Rohit Nagraj of Angel Broking talks about the fall in GRMs or gross refining margins and says oil marketing companies are likely to suffer substantially going forward in FY09. He said upstream oil companies like Cairn will be the direct beneficiaries of the higher crude oil prices. He is also positive on ancillary companies and the gas sector.

Excerpts from CNBC-TV18's exclusive interview with Rohit Nagraj:

Q: With global news or trends indicating refining margins are falling, how would you use the news to stock pick in the Indian market? Would that make oil marketing companies even less attractive?

A: It is a clear indication that oil marketing companies are likely to suffer substantially going forward in FY09. As last year we have seen the under recoveries of close to Rs 78,000 crore, this year we are expecting the under recoveries of close to Rs 2 lakh crore. So that is going to take a major hit on the oil marketing companies, so clearly a no-no for these companies.

Q: In this context how would you play Reliance?

A: For a short-term, there will be a blip in terms of its GRMs but we need to take a long-term view. I believe going forward, it would not have a significant hit on its GRMs, but correspondingly since we follow the Singapore GRMs, which have been down during the past several days because of this spike in oil prices this particular quarter, Reliance’s GRMs would be affected. But since Reliance is more inclined towards diesel and the margins for diesel internationally are pretty strong as well as the demand, in that case, the effect on Reliance GRMs would be pretty normal.

Q: What about Reliance Petroleum, how would you play the stock given that their capacities also coming onstream shortly?

A: Reliance Petroleum is a similar story like Reliance. They would be having a cushion of higher GRMs because the complexity is higher than Reliance’s current Jamnagar Refinery. Apart from that, it would be exporting most amount of the diesel-fuel to other Asian economies. So in that case the margins would not take a significant hit.

Q: What would be the other stock picking when you looked at news like falling GRMs? What about upstream oil companies or ancillaries or even the gas sector for that matter?

A: Upstream oil companies yes, but in that case also we need to look at private companies like Cairn because they are the direct beneficiaries of the higher crude oil prices. A dollar increase in crude oil prices usually translates into around 1.5-2% increase in earnings directly. So these companies look good, ONGC again because of the regulatory concerns and cap on its selling price to the oil marketing companies does not get much benefit from the higher oil prices.

We are positive on ancillary companies because since more and more oil needs to be explored from different fields, the services sector is going to have most of the demand coming in.

Gas sector is surely a positive, because it is a substitute for oil and with the rising oil prices people will start looking at gas companies as investment ideas.

Disclosures:

I do not personally hold any of the stocks, but we have recommended the same to our clients.