Market Watch: Nothing crude about refining
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Market Watch: Nothing crude about refining

However, if the market remains in the grip of the current trading frenzy, these are the stocks that might generate quick returns, writes Udayan Mukherjee.

india Updated: Nov 16, 2007 00:16 IST
Udayan Mukherjee
Udayan Mukherjee
Hindustan Times

The story began with Reliance Petroleum. The whole world sat up and took notice when its scrip zoomed to Rs 295. Suddenly, oil refineries looked like the place to be. Reliance Petroleum corrected but the legacy of its move continues to fire up the entire sector. In the last few days, the refining space has been re-rated by the market. So much so that even the perennial dogs, Hindustan Petroleum and Bharat Petroleum, jumped more than 15 per cent on Thursday.

After Reliance Petroleum, came Essar Oil. The logic: if Reliance Petroleum, even after correcting, can command a market capitalisation of Rs 1 lakh crore, why should Essar Oil, with an operational refining capacity of 10 million tonnes, languish at Rs 7,000-8,000 crore. So, Essar Oil doubled effortlessly in the last few days. Whether the dog is wrong or the tail is, does not matter in such market conditions. All you need is a reason. So, now if Reliance Petroleum and Essar Oil can justify such lofty valuations why should the poor state-owned refiners be left out? After all, Chennai Petro has the same capacity as Essar Oil, albeit with much lower Nelson Complexity, yet gets only a third of Essar Oil's market cap. Bongaigaon, too, till the day before, was only at Rs 1,500 crore market value, so it jumped 30 per cent on Thursday. While these rallies may look insane, frankly at least the state-owned refineries have some semblance of value in them and their stock prices are far easier to justify fundamentally than those of their private sector peers. The poor oil marketing companies must have been sulking enviously in a corner, till someone pointed out that Bharat Petroleum actually had a refinery double the size of Essar Oil, yet traded at a 30 per cent discount to it. Hindustan Petroleum has a 13 million tonne refinery but only Rs 10,000 crore market cap because of the government's wonderfully "progressive" policies on oil pricing. They had to move.

So, is this all irrational exuberance? Not all of it. There probably is value in the state-owned oil companies, even if their moves are triggered by the wrong reasons. Reliance Petroleum and Essar Oil are trickier as their moves seem connected, in terms of valuation benchmarks. It requires very aggressive assumptions of future refining margins to explain their stock prices, which most experts are a bit cagey about. Not to mention execution risk, something that evidently does not worry the market nowadays. However, if the market remains in the grip of the current trading frenzy, these are the stocks that might generate quick returns. As you may have noticed, Dalal Street nowadays has a Las Vegas kind of feel to it.

Executive Editor, CNBC-TV18

First Published: Nov 15, 2007 21:20 IST