Prayesh Jain, IIFL says the house has a buy rating on Reliance Industries. Not only is the company seeing a benefit from the gas price hike but it has made huge investments in the core business of soft refining and petrochemicals, which will be profit accretive in the next couple of years.
Reliance’s other investments into retail and telecom businesses will also start adding to profitability over the years and so, the house is bullish on the company.
Meanwhile, with government now preparing for the general elections, it is highly unlikely it will allow more than 50 paise per month hike in diesel prices but is also doubtful that 50 paise hike per month itself is sustainable.
However, if the under recovery theme does play out then BPCL and Oil India are the companies that would stand to benefit, he adds.
Also read: Expect at least 1 pre-election rally; stick to PSUs: Quantum
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What have you made about the government trying to increase in diesel per month? Do you think it is likely and if it does happen then realistically how much could they go up to?
A: We find it very difficult to accept that government will allow more than 50 paise hike in diesel prices given the election year.
We even doubt whether the 50 paise per month hike is sustainable over the next three-four months especially with election round the corner. If it come across that government allows a Rs 2 or Rs 3 hike, would be definitely a sentiment booster for oil marketing companies (OMCs) and upstream companies and the likes of Oil and Natural Gas Corporation (ONGC) and Oil India. So the best play if somebody really wants to play this under recovery theme is Hindustan Petroleum Corporation Ltd (HPCL).
Q: Would you play that under recovery theme or do you think it’s a highly cautious theme to play because in an election year - forget about hiking diesel prices even that minimum amount may not come through?
A: We wouldn’t pitch this theme to our investors. In fact we have advised them to hold on to stocks like Bharat Petroleum Corporation (BPCL) and Oil India in the entire public sector undertaking (PSU) pack. BPCL because of the upstream portfolio and Oil India because of production growth, plus if at all the under recovery theme plays out then these two companies will benefit.
Therefore, we like these stories more than likes of HPCL or ONGC for that matter.
Q What is your call on Reliance Industries? Over the last few months we noticed that every time it crosses Rs 900, it doesn’t sustain above those levels for a longer period nor does it rally too much beyond levels of Rs 900. Do you think it is capped to these higher levels?
A: We have a buy rating on Reliance Industries; in fact it is one of our top picks in the oil and gas sector. Apart from exploration and production (E&P) benefit that we are seeing in the form of gas price hike, we are bullish on other two core businesses like refining and petrochemicals where the company has made huge investments. Those investments will be starting to be revenue as well as profit accretive over the next couple of years.
So, these two businesses and additionally telecom and retail businesses where it has made investments will also be adding to profitability over the next few years. So apart from E&P these segments will play out well in the next couple of years. That is the reason we are bullish on Reliance Industries.
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