Fuel hike: Nirmal Bang cautiously optimistic on oil stock

After the Finance Ministry refused to share the subsidy burden of the oil marketing companies, Petroleum Ministry with recommendations from Kelkar Committee, is pressing for an increase in fuel price to cut the subsidy to minimum during the next two-four years. Mehraboon Irani of Nirmal Bang Securities is cautiously optimistic on the move. In an interview to CNBC-TV18, Irani said that the oil and gas stocks have reached a level where they have nowhere to go, but to go up.

Further Irani finds a few oil and gas stocks like Oil India and Gas Authority of India Limited (GAIL) attractive. For oil marketing companies (OMCs), Irani is bullish on Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), which is moving in a narrow range with no downside risk. Below is an edited transcript of Mehraboon Irani’s interview on CNBC-TV18 Q: How will you approach oil stocks now, given your expectations? What will happen if the fuel price increases?
A: I would use the word cautious optimism. A lot is being said, but things have to actually happen. Since the new finance minister took over, he is trying to attack the problem as far as fiscal consolidation goes, downgrading, trying to avert, trying to increase revenues and all sort of things till budget.
As far as expenses are concerned, he is trying to reduce expenses by hitting on the subsidies. In the political climate that we are, announcements and actual implementation are two different things, but so far the intent is clear. As far as the oil and gas stocks goes, they have reached a level where they have nowhere to go, but to go up, but was that reason enough to buy, the answer was no.

As of now, there could be an opportunity somewhere in some of the oil and gas stocks especially something like an Oil India where there could be an initial public offering (IPO) coming from the government or divestment coming. But at the present level even from a dividend yield angle, it looks attractive. There is an opportunity somewhere in GAIL.
With regards to OMCs, BPCL had its own reason to attract attention of quite a few big fund houses. But there is an opportunity in HPCL, which has come down to levels over the last 1.5-2 years, it is moving in a very narrow range with no downside risk. Should one buy considering the fact that it will not go down any further? The answer is no, but now with the intent being clear and things getting attacked, if it happens, there could be an opportunity in some of the stocks. Also Read: Sensex up 100; rail fare hike lifts mood, fuel hike next?

_PAGEBREAK_ Q: Any thoughts on either of these two infra companies GVK or GMR?
A: No, I think these companies have their own problems. They all have to raise funds either by selling off some of the business or raise funds by approaching big houses, a sign of desperation in some way. Now what happens to these stocks in the market in which you could see higher levels mainly on hopes that we will have easing of the monetary policy coming later this month or will have a budget, which despite offering its own dollops to the voting class or the aam admi, will have measures for kick-starting the economy. This is because if the government ever hopes to come back to power next year, they cannot afford to ignore the economy.
If there is a kick-start as far as economic activities goes in this country and economy rebounds between now and elections, that will be the single largest trump card for this government. I am quite confident that this budget is not going to be just a populist budget. There will be measures to kick-start the economy. So on that hope, the market will definitely make an attempt to go up.
Stocks like GVK and GMR and the beaten down stocks across various sectors could provide a lovely trading opportunity. The point is how many of us learn to enter is fine, but exit from the stock is very difficult. Some of the high-beta, beaten down names could outperform relatively to the overall market, if we have a rally going to 6200-6300 over the next two months.
From a trading angle there could be an opportunity on hopes that things will happen, all the stalled projects would get kick-started and money in the stalled projects would get unlocked and things will start moving. On that hope, these stocks could rebound. But from an investment angle looking at the state of the balance sheet, the overleveraged condition of the finances of these companies, fundamentally can’t recommend.

Q: Would you still buy Tata Motors at this price?
A: Not at this price. Unfortunately, Tata Motors has become a global company. One should not be seeing the domestic sales. I used ‘unfortunately’ because I have been seeing it as a dark horse. I should have been more aggressive in my recommendations. In the auto pack, looking at passenger car sales, India and Commercial Vehicle (CV) segment is not showing much signs of improvement.
I would like to remain invested and advice investors to remain invested in Tata Motors. I still feel the best is yet to come for Tata Motors in terms of its performance on the Jaguar Land Rover (JLR) front and a whole lot of products in the pipeline which will be launched. If you look at China’s numbers announced today, and have reasons to believe that China could improve and Europe could be a very different story 2-3 years later, there are reasons to be confident as far as Tata Motors goes over the longer term. The stock has gone up too sharply, especially because of two recent upgrades by two leading foreign brokerage houses.