KR Choksey Sec is bullish on Rel Ind, MRPL in oil sector

Commenting on the run up in the oil sector Jigar Shah of KR Choksey Securities said factors like the short supply of crude and refining capacities is leading to this rally and enjoy high margins. Shah added that in terms of the existing problems like recovery, oil bonds and pricing flexibility, he does not see the government taking very concrete steps to overcome them.

Shah is quite bullish on MRPL in this sector and would definitely look at this stock on a decline. However, he said that Reliance Industries will be his favourite pick within this sector.

Excerpts of CNBC-TV18’s exclusive interview with Jigar Shah:

Q: How are you looking at the oil sector and the run up that you have seen? You think it is justified? Do you have picks in the space?

A: As far as the oil sector concerned, there are 2-3 important factors which are leading to the rally. First of all, internationally, apart from crude which is in short supply, the refining capacity is in even greater short supply. Even a country like Iran, which is the second largest producer of crude oil, doesn’t having refining capacity and has to import the finished product. So the boom in refining products for petroleum is definitely likely to sustain for medium to long-term. That is causing these stocks to rally and enjoy very high margins on the gross refining basis.

The second aspect is that, on a relative basis, some of the refineries in India, especially in the private sector, Reliance has shown wonderful progress and they have been able to register fantastic profit margins. As a result of that, more coastal refineries can come up. Relatively, PSU refineries are quoting at much lower amount of market capitalisation particularly due to the socialistic policy followed by the government. That is the catching that’s happening.

But in terms of the problems that exist like under recovery, oil bonds and pricing flexibility, they continue. I really do not see a very concrete step being announced by the government, at least as of now, to takeaway those fears. So that continues and it’s not changed. But there is a relative catch up that has happened in the wake of optimism that something will happen. Now that something, whether it will happen or not, only time will tell. But fundamentally, we cannot really compare the PSU refineries and Reliance Petroleum, that’s about it.

There is a fantastic run up that has happened and the market capitalizations have now caught upto a very great extent. That leaves very small room from this level for their market cap to go up.

Q: You said that most of the value seems to have been caught up on the part of the PSU oil companies. What are your buys in that space? Also from the small caps space stocks like MRPL, Manali Petro, South Asia Petro all of these stock that have run up today?

A: As far as the petroleum refining stocks are concerned, I have been liking MRPL because of its business model which is slightly different from the others and they have been able to export a lot. But now, with this catch up, I would still stick to Reliance Industries, not even Reliance Petroleum at this level, and that would still be my favorite pick within the sector.

In the public sector, I think, there’s a tremendous amount of stock price increase that has happened in the short-term and therefore, I would avoid. But on declines I would definitely look favorably at MRPL. As far as the other small stocks which have risen in the petrochemical stock, I really do not have any specific view.

At this point in time in the industry, there is no specific policy changes which is very vital for the rejuvenation of the whole industry and the capital expenditure which is envisaged. If that does not happen, the industry would still not be out of the woods; would continue with the troubles and therefore, the whole euphoria that is been seen in the last few days that is not really justified.