Oil marketing companies, suddenly everyone's favourite

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Oil marketing companies, suddenly everyone's favourite

TS Harihar, derivatives analyst at ICICI Securities tells CNBC-TV18 that the irrespective of what happens as an outcome of the EGoM, oil marketing companies (OMCs) appear to be in a sweet spot now.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets BPCL BSE | NSE 01/06/12 Are Mutual Funds betting on BPCL? Other Stocks in this news Hindustan Petroleum Corporation | Petronet LNG Ltd | Indraprastha Gas | GTL | GTL Infrastructure | Lanco Infratech | Royal Orchid Hotels |

TS Harihar, derivatives analyst at ICICI Securities tells CNBC-TV18 that the irrespective of what happens as an outcome of the EGoM, oil marketing companies (OMCs) appear to be in a sweet spot now.

"The dividend yield of OMCs is between 3.5-4.5%. This makes it very attractive as a fixed-income instrument at current prices," he justifies. ICICI Securities has been positive on the downstream companies- BP and HP - for quite sometime now, he says.

Also read: Your fuel bill will stay same; Oil Min says no hike today

Though no breath-taking reform is expected of the EGoM today, it is, however, the beginning of a long journey of reforms for the sector, Harihar says.

"Broadly, the days of dumping losses of oil subsidy into the OMCs' kitty is now officially over," he says. Harihar is confident of a turnaround in the oil environment and says that the sector is now geared for a revision in rating for the OMCs on the upside.

Among midcaps, Petronet LNG and Indraprastha Gas offer good value, he says. Both companies have witnessed quite a bit of accumulation, and in the past few days, the market has cut shorts in these stocks quite hurriedly. "We see at least a 10-12% trading upside in these stocks over the quarter," he says.

Below is the verbatim transcript. Also watch the accompanying videos

Oil Marketing pack

We have been positive on both the downstream oil marketing plays, HP and BP, for quite sometime. Our justification has only been ratified by the noise coming from the EGoM meeting today. What we expect is that today we may not see any breadth taking reforms, but it could be the beginning of a long journey as far as oil reforms are concerned. We could see the beginning of a series of hike on diesel. Possibly, some hikes on the LPG space and petrol could also be expected. The broad story seems to be that the days of dumping all the losses of oil subsidy into the oil marketing companies seems to be over. It may not happen overnight, but I think we could see the beginning of an upward rating for most of the oil marketing companies. Secondly, if you look at the dividend yields on these oil marketing companies, it is anywhere between 3.5-4.5%. Even assuming nothing else happens, they continue to be attractive as a kind of fixed income instrument at current prices. Considering these two facts, we believe that oil marketing companies could be in a sweet spot at this point of time.

On Petronet LNG and Indraprastha Gas

We like two of the midcaps in the oil & gas space. One is Petronet LNG and the other is Indraprastha Gas. We believe that IGL is the company where the pricing power is still in the hands of the manufacturer and we have seen it raising prices of gas in Delhi. IGL has been seeing a good amount of accumulation; in fact, last few days we saw all the shorts getting cut quite hurriedly. So we believe that (over the) quarter, there could at least be a 10-12% trading upside on these stocks.

On Infrastructure

There are problems in the sector. When I look at the derivatives data, there seems to be a real urgency among people to close their long positions and, not surprising, due to the kind of news flow that we have seen on stocks like GTL , GTL Infra , Lanco and Orchid . People are concerned that most of these small to mid infrastructure plays have problems either in terms of too much of promoters' stake being pledged or upcoming redemptions/convergence on FCCBs. When we speak to traders and investors, there seems to be a scare among all of them about taking fresh positions on these infra stocks. So I think at least for the short to foreseeable future, we believe that pressure on these stocks will continue.