Bullish outlook on oil refining and marketing companies

Mumbai: Despite the recent crash in the stock prices of oil refinering and marketing companies ONGC, Gail, Reliance, HPCL, BPCL and IOC , most oil analysts are bullish on the sector. The long term trend, analysts say, is a firm trend in refining margins and strong revival in domestic demand.

Analyst believe a sharp slowdown in capacity increases due to low margins over the past eight years portend that the industry is at the threshold of an intense boom in the petrochemical cycle over the next two years. In addition, buoyant shipping freight rates due to increased global trade is likely to fuel a boom in the petrochemical cycle.

Mr Sanjay Sinha, fund manager at UTI MF's star perrming Petro Fund said, "The global petrochemical cycle is on uptrend and I expect the cycle to strengthen further in 2004-05 and 2005-06." However, these counters are seeing intense profit booking, with market participants cashing out ahead of the public offerings of some of these oil PSUs, he added.

In the last one week, the stocks of oil refinery and marketing companies have come under aggressive selling pressure with public offerings of 6 PSUs amounting to Rs 20,000 crore expected to hit the secondary market. While the HPCL and BPCL scrips have lost 2.5 per cent and 5.34 per cent, respectively, in the last one week, the ONGC stock has been highly volatile.From Rs 749 on February 11, it hit a high of Rs 769 in the course of the week before ending at Rs 746 on Friday, down a marginal 0.4 per cent on a week-on-week basis. Reliance Industries too was extremely volatile, touching a high of Rs 604 on February 18, before closing at Rs 588 on Friday. IOC meanwhile, ended 0.4 per cent higher over last week's closing price. However all these scrips have appreciated in the range of 22 to 43 per cent since the beginning of November 2003.

Fundamentals apart, the free float of ONGC after the current offering will rise to 13.9 per cent (with a free float capitalization of US$3.2 billion). The size is likely to ensure that ONGC finds a place in the MSCI India index after the sale, which means the entire free float should be available for foreign institutional investors, said a research head with a foreign broking firm. However, in the short term their equity offering in the secondary market may keep their valuation depressed, he added.

ABN Amro in its recent report on the oil sector notes, "The Outlook for core business earnings has never looked better --refining margins are on an upswing, volume growth is picking up and prospects for intense retail competition are diminishing. We anticipate a structural rebound in regional refining margins on the back of an improvement in the demand-supply balance. The introduction of new clean fuel standards by 2005-06 should spur further capacity rationalisation. Indian refiners are upgrading their facilities and appear well positioned to benefit from this uptrend, the report added.