News Detail

• Investors looking for an exposure to the oil sector should be betting on state-owned oil marketing companies, says Jal Irani, managing director, Macquarie Securities.Valuations of these companies are attractive, and while their finances may be in a precarious condition, this could force the government to support them, Irani said in an interview to CNBC-TV18. He sees ONGC as a defensive bet among state-owned oil companies.On Reliance Industries , Irani says third quarter earnings could fall as much as 20% compared with the preceding quarter's numbers. Gas output from Reliance's KGD6 will continue to decline in the third quarter, and the company is unlikely to benefit much from the depreciation in the rupee.Also Read: Baer Cap expects Sensex to move up to 17000-17500 in 2012

• Irani expects RIL's gross refining margin for the quarter to be between USD 6-7 per barrel. Concerns about a weak third quarter performance dragged the RIL stock below Rs 700 a couple of weeks back. And while the stock has managed to recover to around Rs 740 since then, most investors are wary. Irani, however sees the company reporting better numbers for the current (March) quarter.Reliance falling output at its KGD6 block comes as a blessing for Petronet LNG, as demand for liquefied natural gas will go up till supply from KGD6 starts flowing in. Irani sees Petronet LNG as being in a "sweet spot" because of the problems in KGD6, and expects the company to do well for the next 18 months. Irani expects BG's stake in Gujarat Gas to be sold at a premium, as city gas supply is a high growth area at the moment.

• Q: There has been a lot of apprehension about what Reliance might report in the current quarter given the weakness in refining margins, what are your expectations?

• A: Reliance could report 20% quarter on quarter dip over the September quarter in earnings. Essentially, refinery business has been rather weak. Within the refinery business, Naphtha which is about 1/5th of their total portfolio has been extremely weak and to the extent of about USD 7-8 in terms of crack spreads. So, that has impacted profits this quarter.

• Also worth noting is that the rupee has been rather weak. It has depreciated about 16-17%. What one would have normally expected is that given that pretty much all the businesses are dollar denominated that would flow down to the bottom-line. But there it seems that the benefits would be postponed to the next quarter because they sell the dollars when they sell the products forward. So, they would have got a lower rupee-dollar rate than what is prevalent at the movement.

• Going forward, into the 4th quarter we would expect that profits would be better because Naphtha crack spread have already bounced not all the way back up but about USD 4-5 and that dip was a temporary phenomenon. The rupee-dollar rate also benefit will flow through with the lag effect. So, 4th quarter would be better.

• Q: What are you expecting to hear on the gas front for the current quarter?

• A: The production has averaged from about 39 mmscmd and product prices are the same. There nevertheless because it is a dollar denominated business that should flow to the bottom line straightaway. So, volumes can be declining and rupee prices would be better but nothing earth shattering there.

• What is worth noting on the gas front is that they have received approval from the director general of Hydrocarbon on four of their nine satellite fields. Not only will this enhance their production by about 25% or 10 mmscmd starting in 2016 and reserves by a similar amount, but also it means that after a significant hiatus that approvals are coming through.

• This could be a change in fortunes, they have got several other very prolific blocks such as NEC 25 and the R1 area within the KG-D6 basin which is extremely prolific. That is a significant positive turnaround, but as I said it's pretty much long term volume increase perhaps 2016.

• Q: The big crumble for Reliance below that Rs 700 mark happens specifically on concerns with what happens with the GRM figure. How bad you think that's going to be USD 6 per barrel, something less than that? Is the market overdoing the case on that front?

• A: It could be between USD 6-7 so that is going to be weak. In the last quarter it was around USD 10.1 so that would be pretty weak number. I wouldn't worry about things on a quarter to quarter basis because this is a freakish quarter where Naphtha crack spreads being so low having dip USD 7-8 hasn't really happened in the past. It does tend to correct itself. It seems to be correcting itself already fairly quickly.

• Q: How do you approach the oil marketing companies because you are actually playing bullish on some of those names?

• A: The oil marketing companies are my top pick in the space. They have been beaten down miserably, everybody at the moment is extremely negative on the subsidies and rightfully so. It seems that the subsidy gap according to our calculations may rise to USD 34 billion or even more. That is a very large number to plug. This is exactly the time when everything looks bleak for the oil marketing companies that you should be buying them.

• The government can't afford to give them significantly lower profits, so I don't believe they will be bearing a much larger portion of the subsidy then they already are. The reason is they can't otherwise they would go bankrupt and you would have no fuel distribution in the country. So, the profits even in the current dismal environment are not going to change materially.

• Now on effectively flat profits to perpetuity and that's almost like a government guaranteed bond because they are government companies and they can't go bankrupt, these stocks are quoting extremely cheap. They are quoting at 5-7 times PR. The market is saying that PR of 7 or lower is a no growth company.

• In sharp contrast you have got huge capacities coming on-stream which will actually add to growth on top of the current flat profits such as Bina and Bhatinda which would add 20-30% profits. Even in the longer term these companies have taken a very strategic decision to spend about USD 10 billion over the next five years away from the oil marketing space.

• You are going to see earnings growth flowing through even in the near term, very cheap valuations and progressive rerating. This is going to be a very large kicker to the stocks on a very sustainable basis even without potentially a deregulation trigger. A deregulation trigger always comes up ever so often unlikely in the near term, but when it does come up the stocks tend to run very hard. Even in the current environment there is every reason to pick them up and if you get a deregulation trigger you got a much larger kicker.

Source