FII interest in state-run OMCs at highest in at least 7 years

Mumbai: Once shunned by foreign investors, Indian state-run oil marketing companies (OMC), seem to have garnered huge interest from foreign institutional investors (FIIs). Their stake in these companies is around the highest level in at least seven years, thanks to the fuel deregulation move by the government over the last few years and fall in crude oil prices since 2014.

The interest is seen continuing for now as there is not much to worry until crude prices breach $60-$70 per barrel, analysts say.

For Bharat Petroleum Corp. Ltd (BPCL) and Indian Oil Corp. Ltd, (IOC), FIIs stake at the end of March quarter had risen to 21.13% and 4.20%, respectively, the highest level in at least seven years, data from Prime Database showed.

FIIs stake in these companies stood at 8.28% and 0.92%, respectively in the quarter ended June 2009.

At the same time, their interest in Hindustan Petroleum Corp. Ltd (HPCL), stood at 19.75% at the end of quarter ended September 2015, its highest level since quarter ended June 2009. FIIs held 8.95% in HPCL at the end of June 2009 quarter, and 14.97% at the end of March 2016 quarter.

“If you look at the earnings of OMCs, even if crude remains around $50-60 dollar a barrel, they are not really affected. Of course, there will be incremental working capital and subsequent interest expense debt requirement,” said Sudeep Anand, vice-president,institutional equities at IDBI Capital Markets Ltd.

“If you look at volumes, marketing margins on diesel and petroleum products are buoyant,” added Anand.

Though Anand currently has a buy ratings on state-run OMCs, all the target prices have been breached, and he might revisit the rating post the quarterly earnings of these companies.

“If crude breaches $60 mark, OMCs could be under pressure,” added Anand.

The government decided to stop controlling diesel price in October 2014, allowing it to be set by the market, after they freed petrol prices in June 2010. This deregulation coupled with a slide in crude oil prices have made these stocks lucrative to investors.

Brent crude had fallen to a 12-year low of $30.84 per barrel on 20 January 2016. It later recovered 57% to $49.85 per barrel to hit its highest level in 2016 on 18 May.

Oil prices erased some of the gains in recent sessions. On Tuesday, Brent crude was trading at 0.06% higher at $48.38 per barrel.

The once-ignored stocks, are surely a favourite for now.

According to Bloomberg, 34 brokerages have a buy rating on BPCL, while two have hold and three recommend sell on the stock. For HPCL, 31 brokerages rate it a buy, two rate it a hold, while four brokerages recommend a sell on the stock.

IOC has 34 brokerages recommending a buy, two asking investors to hold, while only one recommends a sell.

With petrol diesel prices in India pegged to their cost of production, stocks of state-run refiners have outperformed the benchmark in the recent past.

Over the last one-year, two-year and three-year period, BPCL shares have risen 14.5%, 60% and 130% respectively. In the same period, HPCL shares have gained 31.3%, 87% and 178% respectively, while IOC shares rallied 13.5%, 11.7% and 35.3%, respectively.

Over the last one year, BSE’s 30-share benchmark Sensex fell 9.49%, while for a two-year and three-year period it logged gains of 3.82% and 26.13%, respectively.

“We still have a buy on these stocks. When we arrived at this rating, we had pencilled in crude at $60 for these companies,” an analyst with a foreign brokerage, who did not wish to be named said referring to HPCL, BPCL and IOC.

“I think things would get uncomfortable if crude touches $70 a barrel. For now, these are one of the good bets among Asian oil and gas companies,” the analyst added.

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