I was trying to look up some numbers in the oil & gas sector and there's something that struck me. Here's the thing:
IOC
- Refining cap (42 mln)
- Mcap (Rs.55k crore)
- Value/tonne of refining capacity (Rs.13,095/tonne)
RIL
- Refining cap (33 mln)
- Mcap (Rs.198k crore)
- Value/tonne of refining capacity (Rs.60,000/tonne)
BPCL
- Refining cap (14.6 mln)
- Mcap (Rs.9,970 crore)
- Value/tonne of refining of capacity (Rs.6,830/tonne)
HPCL
- Refining cap (13 mln)
- Mcap (Rs.9,760 crore)
- Value/tonne of refining capacity (Rs.7,512/tonne)
MRPL
- Refining cap (9.69 mln)
- Mcap (Rs.7,003 crore)
- Value/tonne of refining capacity (Rs.7,226/tonne)
Reliance Petroleum
- Upcoming refining capacity (29 mln)
- Mcap (Rs.31,250 crore)
- Value/tonne of refininf capacity (Rs.10,776/tonne)
Now, the question if pure refining companies like MRPL and Reliance Petroleum are trading at valuations in the range of Rs.7,000-10,000 per tonne, then why are companies such as BPCL and HPCL trading at a lower end of this range? I mean where is the value for their petro-products distribution & marketing network, which by the way controls close to 25-30% of India's total oil marketing network???
I think they are worth investing at this point of time. Value Stocks in the true sense, I think!!
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7 comments:
I think that there is too much simplicity in your analysis. While your question is good, "where is value of mkt and distribution network"; a better question is "what has been the discount of BP and HP to others in the same metric" historically. I.e: How do you realize value from the network. If you keep bearing losses due to government and is not allowed to sell the network to others, there is no way you can realize value. Such things exist in PSU valuation always - in the same vein, MTNL is also a BUY at all points then. So I think that top line can give you stocks to look at, but conclusion can only come after a more detailed bottom-up.
Ronie: You are right. It was indeed very simplistic and that the conclusion should be drawn only upon a more detailed bottom-up. But, the situation is as simple as it sounds. Both, HPCL and BPCL are quoting at a fraction of their replacement costs. Besides, the GoI will not let them bleed, hence the issuance of oil bonds. Further, if you believe that the commodity cycle has topped out, and that crude price may head lower over the next 2-3 yrs, then we are looking at these companies getting back to their historical profit levels.
The BIG diff. betwn a MTNL and HPCL/BPCL is absence of subsidy payments. MTNL is fully vulnerable to competition, whereas there oil ratnas are not, atleast not as of now. Irrespective of them making losses, the GoI will make it good...and it has been over the last 2 quarters. Today's MTNL's margins are a third of what they were 6-7 yrs ago. It is still struggling, which is why it actually is not a buy at any point of time. Unless, ofcourse the GoI allows them to hive off some portion of the huge real estate they own, across the two metros - Delhi & Mumbai.
In the market, the price is also determined by the earnings visibility and presently in case of HPCL / BPCL there is hardly any signal that in future they could turn profit making. As regards subsidies, they'll be wholly dependent on the government (which may come/ maynot come) and hence, unless and until a solution is found by the government for future profitability of these firms on a sustainable basis, I don't think they'll get re-rated.
Reliance has more sophisticated refining capabilities than the public sector ones.
They can handle heavy crude also, to some extent, whereas the others need light crude.
See this
http://www.stratfor.com/products/premium/read_article.php?id=265496
The link has been truncated. Google for
reliance heavy crude stratfor
to reach the article
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