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Merrill Lynch bullish on petroleum stocks

Merrill Lynch, in its latest report on the Indian petrochemical sector, has upgraded its investment positions for some major refinery and oil sector stocks. Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL), Indian Oil Corporation (IOC) and Reliance Petroleum.

HPCL has been upgraded to a 'buy' along with BPCL while IOC and Reliance Petroleum have been upgraded to 'accumulate'. Merrill Lynch has reinstated coverage for IOC.

These stocks have risen rapidly at the stock markets over the last three months. HPCL rose from Rs 100.65 on October 24 to Rs 138.30 on December 28, on the Bombay Stock Exchange, with volumes going up from an average 65,000 shares to 250,000 shares. The BPCL counter also witnessed strong trading interest with volumes rising from an average 90,000 shares to 125,000 shares in the same period. The BPCL scrip rose from Rs 74.72 (adjusted for bonus) on October 13 to Rs 117.05 on December 28.

One factor driving up prices of some petroleum stocks over the past two weeks has been fresh buying interest through some large domestic mutual funds like Prudential ICICI, Templeton and some brokerages like Kotak Securities.

Merrill Lynch, in its report, states that the BPCL stock is trading at a 33 per cent discount to its peers. "The company has seen its highest growth in the retail oil sector and BPCL has more owned/leased retail outlets than its peers. This should provide downside risk protection post-marketing deregulation," the report states.

The Merrill report also states that fears linked to the dilution in BPCL equity to part-fund acquisition of standalone refineries have been overstated and the market has already discounted this factor.

Commenting on HPCL, the report states that higher refining volumes will drive earnings by 14-15 per cent per annum over the next two years. Higher refining volumes are expected to come from the long delayed expansion at the Vishakapatnam plant.

"The outlook on refining margins should improve as the demand growth will move ahead of the capacity additions in the Asia-Pacific region," the report stated.

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