Why Samir Arora went against his investment philosophy for this company

Samir Arora maintains that having a flexible mindset is key to investment success.

Celebrated fund manager Samir Arora said he has invested in oil and gas company HPCL due to incredibly cheap valuations, in an exclusive interview with Moneycontrol on July 5. HPCL is a state-owned oil refining and marketing company. The stock was trading nearly 2 percent higher at Rs 283.60 at 12:30pm on July 5.

“I bought it based on one comment from my analyst who said that it was incredibly cheap – the company was quoting at a market-capitalisation lower than that of Zomato,” he said. Arora had bought Zomato around Rs 50 levels, when the market-capitalisation was roughly around Rs 40,000 crore. Currently, at Rs 74, Zomato enjoys a market-cap of Rs 62,000 crore. On the other hand, at the current price of Rs 284, HPCL commands at a market-cap of Rs 40,000 crore.

In FY23, Zomato clocked sales of Rs 7,079 crore and net loss of Rs 970 crore while HPCL clocked revenue of Rs 4,40,000 crore and net loss of Rs 9,471 crore. But Arora sees the profitability equation change for HPCL.

Oil refining companies have been under pressure and making losses because they do not have full flexibility to price petrol and diesel. When crude prices were climbing higher they were unable to fully pass on the price hikes to consumers, so they incurred losses. Plus, they also incur some bit of losses on subsidised products like Kerosene. But this year may be different as crude prices have settled lower but prices of petrol and diesel have been maintained at higher levels which means companies will make profits.

Watch the full interview with Samir Arora here

Arora has thus far maintained that as a matter of philosophy he does not invest in state-owned companies which usually end up losing market-share to nimble-footed private players, and business where the business has a large “regulatory component.” While the past year was bad for refining companies, Arora feels that oil companies are now in a sweet spot as the “government is allowing” companies to take the profits that are coming their way. “The government has permitted these companies to not cut down prices and take the profits. This will help companies to retain their earnings.”

As crude oil prices decline sharply from the highs of 2022,   analysts believe that Indian oil refiners and gas companies will see a robust FY24. The state- run oil refining companies are poised for higher marketing margins. Domestic brokerage firm ICICI Securities is bullish on Oil Marketing Companies (OMCs) owing to steadier GRMs (gross refining margins) and stronger marketing margins. Upstream companies are also likely to benefit from realisations of at least US$75/bbl over FY24-25E, reported the brokerage firm.

Arora maintains that having a flexible mindset is key to investment success. “Why can’t I buy two stocks, one for its incredible growth, and one for its incredibly cheap valuation.”