OMCs can have a further trading rally: Dipan Mehta

Dipan Mehta, Director, Elixir Equities, says “in a market like this where every industry, every company or the most investment grade companies are quoting at very rich PE multiples, investors are going to deploy their cash in the market. The only low PE, low valuation segment is the oil marketing companies and we are seeing a lot of money being poured over there. This trend will continue for some more time.”



You track the energy space closely. QatarEnergy extended a key LNG supply deal all the way into 20 years, beyond 2028 now. What are you making of the leaps that the energy sector in India is making going beyond Reliance so to speak and the kind of cheap valuations these stocks are still trading at?

Dipan Mehta: In oil marketing companies and GAIL, we are seeing a multi-decade adjustment in valuation at this point of time. Generally, the overall expectation is that because of low oil prices, there is a great deal of flexibility when it comes to pricing and therefore marking margins will steady or may even go up for these oil marketing companies that is point number one.

Secondly, a lot of the expansion plans, especially BP, HP in terms of refining capacity is going onstream and instantly that will add to the bottom line of the company because that much less traded volumes will take place and refining margins still remain pretty much strong and some of this is brownfield expansion so it will improve the productivity of the existing asset and improve return ratios.

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In a market like this where every industry, every company or the most investment grade companies are quoting at very rich PE multiples, investors are going to deploy their cash in the market. The only low PE, low valuation segment is the oil marketing companies and we are seeing a lot of money being poured over there. This trend will continue for some more time.

Oil marketing companies can have a further trading rally even from these levels, but these are not great long-term investment stocks as we have seen. Their performance is extremely patchy and if oil prices start to move up, then these companies profitability will certainly come under stress. So, while they are great trading opportunities, I am not sure I can look at buying HP, BP, Indian Oil on a three-five-year investment horizon.

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Harry Byrne

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