Sharma, co founder of First Global says that crude might
cool off to $50 per barrel. As a result, he feels this
would help the earnings of HPCL and BPCL, adding that
their earnings "can quadruple, factoring in oil
also says that oil bonds and the fall in crude prices
will be a major catalysts for oil stocks.
is bullish on the tech pack and Ranbaxy, but not too
bullish on ONGC as he feels that there is not too much
money to be made there. CNBC-TV18 shares with domain-b
its exclusive interview with Sharma:
reports say it is time to buy stocks like HP and a BP,
tell us why?
Last time, I had mentioned that the stocks had turned
very attractive and that there was a pretty reasonable
chance of an up trend. We think that HP and BP are absolutely
at the top of their business cycles and they can only
get better in terms of the earnings outlook. Our forecast
is for earnings to roughly quadruple over the next two
years time. That includes the effect of oil bonds, etc.
what I don't think the market is factoring in is the
fact that there is a distinct possibility that oil prices
can definitely cool off from the levels of $70-75, where
it has been over the last 12 months. Should that happen,
while there is no one-to-one relationship between the
oil price decline or a rise and a commensurate rise
or fall in HP, BP's profits, there will be a lose relationship.
lose relationship, and rest everything being equal,
will mean very good signs if oil were to fall to levels
of $50-55 or even $45. Our forecast is that oil will
probably see those levels during the course of the next
12 months. Hence, if that happens, one will be looking
at a very strong earnings growth scenario.
if that does not happen, the stocks are very cheap.
There is 50 per cent replacement value, 0.1 time sales
and the fact that even excluding the effect of oil price
decrease, we are looking at a tripling of the EPS over
the next two years. I don't think there is risk in buying
these companies at these levels. That's really what
our basic take on the sector is.
counter point for a lot of investors would be that there
might not be too much downside from a valuation perspective.
These stocks may not start a bout of out performance
because of policy issues and if oil does not cool down,
then why be in a sector where there might not be too
much downside, but there might be restricted upside?
When there is scepticism, there is money to be made.
When everybody has an agreement, usually most of the
money has already been made. So there is scepticism
and there ought to be scepticism in terms of these oil-marketing
companies because even the government has rarely handled
that's exactly our point that at some point, the skepticism
is actually tending on the verge of paranoia, while
the stocks and the valuations have reached a level,
wherein the smallest of catalyst, will drive these stocks
up. I think the catalyst will be number one, the oil
price and oil price decline.
catalyst, which we expect to happen, is of course the
oil bonds being issued by the government in the second
quarter; these two catalysts, I think are enough to
drive these stocks up. Once the market sees that things
are panning out, in a sense that there is a positive
tailwind behind these companies, and then one will see
these concerns and skepticism simply melting away. We
have seen it happen in several other sectors and companies
before. I see no reasons why these companies should
continue to have investor's skepticism attached to them.
have done some sensitivity analysis as well of how much
their earnings could go up if crude cools down by X
and Y and how their valuations would look, could you
take us through that?
Basically, if you look at HP, BP and take the best case
earnings forecast that we have, if we were to sensitise
and say that crude were to cool off to $60 on an average,
one will be looking at another 10 per cent upside to
their earnings forecast for FY08. Nothing much will
change in FY07 because we are already pretty much half
way through. But the real effect of an oil price decline
will factor into FY08 earnings and at the margin again,
there is no one one way to calculate the effect of an
oil price decline on the earnings upswing for these
companies. But there is relationship that one can establish.
a 10 per cent rise of roughly every $4-5 in crude oil
fall is what one can see if we bet on. Our view on oil
is actually that it will probably surprise us all in
terms of how low it can go. Hence, our take is that
one is probably looking at $40-45; definitely it's out
of 50 over the next 12 months time. Should that happen,
add another 25 per cent to our best case earnings forecast
for HP, BP for FY08.
one is looking at a company, which will quadruple, perhaps
even five times the earnings of FY06. What's there to
lose; the EBITDA margins we are talking about are 2-2.5
per cent, in FY04, they were at about 7 per cent odd.
So we are still conservative when we are forecasting
EBITDA margins going forward. Should there be a minor
uptake on the EBITDA beyond our best case, again one
will be looking at a substantial upside. So one has
to weigh the negatives and the positives and our sense
is that the positives far outweigh the negatives in
these two companies.
Is there anything that you like in the standalone
refineries as well at this point?
No, I would hold back an opinion on that. HP and BP
are the two we liked and that's where we are advising
people to put their money in.
are you feeling about the market, I was reading another
report of yours, which said that within emerging markets,
you actually see India taking out its previous highs?
That's a view we maintained all of July. We see nothing
on the radar to compel us to alter our view. If you
look at the markets, they have been very strong; there
have been no problems whatsoever on the earnings front
in the first quarter. I think the global factors were
again exaggerated in terms of the effect on India. India
is still largely an insulated economy. But even if one
were to say that okay, what happens if interest rates
rise, or the dollar sort of falls, or commodity prices
rally; the fact is that none of those scenarios we think
don't think inflation is going up, we don't think that
the dollar is going to fall. On the contrary a case
can be made for the dollar to strengthen; we don't think
oil prices are going up. If you put everything together
and see, we think the environment for global equities
is very good, probably the best it has been in the last
six-eight months time. Within the context of global
equities, India is clearly a standout performer; I don't
think any market has seen the kind of earnings growth
that India has seen in the last 12 months, even the
there is one destination within emerging markets or
within global equities that one wants to definitely
be in because of size, liquidity and earnings growth,
I think one can't do much better than buy in India.
The fact is that India is very optimistic, now that
markets are sold off, consolidated a bit, a bit of the
froth has been taken out, I think investors are in a
you extend your optimism by giving your view on crude
to things like ONGC and GAIL, or your view is not very
In ONGC again, the government is definitely an issue,
we have been negative on ONGC for quite a while now
and we have just turned moderately optimistic on it.
But I don't think that is a place where one will really
look at making serious money and that is not a stock
that is going to go up 40-50-100 per cent will probably
stay on the sidelines for ONGC. We don't cover GAIL.
you still stick to the view that midcaps will continue
to outperform as they have in the last one week or so,
or do you think much of the pullback has happened already?
No, midcaps started showing their weakness the same
time last year and they have endured a one-year bear
market. I think looking at the numbers Q1 delivered,
a number of those stocks in hindsight have proved to
be very cheap. We think, the market will continue to
re-rate them; we are very optimistic on the future of
midcaps and in large caps, the refiners; Reliance, the
technology pack and Ranbaxy continue to be our favourites.
is a sector we turned negative on about a month-and-half
back. The margin pressures have been evident in the
last quarterly numbers that have come out for most of
those packs. So there are no permanent likes or dislikes.
Construction is something we liked for three years and
we don't like it anymore. On the other hand, the refineries
again are not something that we have not liked for all
these reasons, now we sort of like them.
has to keep moving in pace with where the market is
telling one to go and we think these are the spaces
in which one will outperform in the market.