Bullish outlook presaged in oil stocks

Boom ahead for sector on capacity expansion: Analysts

Despite the recent crash in the stock prices of oil refining and marketing majors, most oil sector analysts are bullish on the segment.

Oil and Natural Gas Corporation (ONGC), GAIL India, Reliance Industries, Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation (IOC) had recently witnessed a slide in their stock prices.

According to analysts, the long-term trend in refining margins will be firm and a strong revival is expected in domestic demand.

They believe a sharp slowdown in capacity expansion due to low margins over the past eight years portend that the industry is at the threshold of a boom in the petrochemical cycle in the next two years.

In addition, buoyant shipping freight rates due to increased global trade is likely to fuel a spurt in the cycle.

Sanjay Sinha, fund manager at UTI Mutual Fund's Petro Fund, said, "The global petrochemical cycle is on an uptrend and I expect the trend to strengthen 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 public sector units (PSUs), he added.

In the last one week, the stocks of oil refinery and marketing companies have come under selling pressure with the public offerings of six PSUs worth Rs 20,000 crore expected to hit the primary market.

While the HPCL and BPCL scrips have lost 2.5 per cent and 5.34 per cent, respectively, in the last one week, ONGC has been highly volatile. From Rs 749 on February 11, ONGC hit a high of Rs 769 in the course of a week before ending at Rs 746 on February 20, down by 0.4 per cent on a week-on-week basis.

Reliance Industries, too, was volatile, touching a high of Rs 604 on February 18 before closing at Rs 588 on February 20.

IOC, meanwhile, ended 0.4 per cent higher over last week's closing price on February 20. However, all these scrips have appreciated in the range of 22-43 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 capitalisation of $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 department head with a foreign broking firm.

However, in the short-term their equity offering in the market may keep the 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.