Octroi rap may turn IndianOil’s Mathura refinery unviable

The Allahabad High Court’s order on entry tax promises to slash operating profits at IndianOil, even threatening to turn its Mathura refinery unviable.

Analysts said it will be difficult for IndianOil to recover the liability by increasing product cost because of political ramifications.

The Allahabad High Court last week rejected IndianOIl’s plea and upheld the UP Entry Tax Act 2007, under which the company will have to a pay an octroi to Uttar Pradesh at 5%.

The tax will be charged for products coming out of its Mathura refinery and will have a total liability of Rs8,600 crore, including last ten years of interest on the company.

Also, while accepting the company’s review petition, the Supreme Court has asked it to submit 50% of the total liability now and furnish a bank guarantee to pay the balance later.

This deals a big blow to the company’s projections of the gross refining margins of the Mathura refinery and the subsequent profitability of the same.

“Entry tax has been an irrecoverable item for refiners and not included as part of the refinery transfer price (RTP) as it is based on import parity price and does not include local taxes,” said Amit Rustagi, Ruchi Dugar and Miten Vora of Antique Stock Broking.

The burden will grossly reduce the 8 million metric tonne per annum Mathura refinery’s margins, which average around $3.9 per barrel, they wrote in a note.

Other analysts said the refinery had been clocking margins of above $6 per barrel for the last two fiscals and even this will be hit due to the impact of the tax liability.

An analyst with a leading international brokerage said the impact of the tax liability on the output of the refinery will be $5.5 per barrel, which will eventually lead to minimal or no margins for the refinery the next year.

Rustagi, Dugar and Vora said the tax liability will lead to about 2.5% under-realisation from the refinery, translating into an impact of Rs740 crore on operating profit on recurring earnings.

Experts say it will also be difficult for the company to raise prices in the state.