Say ‘NO’ to Oil Scrips

Stock market investors must be having a good time. And they have every reason to be happy. The market has been taking new heights. Stock Market has bounced back after the May 18, 2006 downfall which ate into the valuations of the scrips. Supported by strong quarterly results, the valuations of stocks are climbing up. But I am more concerned about the Oil Companies which are not giving decent gains to the investors. I am talking about the Oil Majors, namely, IOCL, BPCL, and HPCL I intend to discuss with you the performance of these scrips over the last few months.

For the purpose of discussion I would like to compare the ‘Oil’ scrips with my own favorite stocks as mentioned in Table 1 which shows the closing values of the Index & the scrips on the mentioned date.


31-Aug-06 23-Nov-06 % change
SENSEX 11699.1 13680.83 16.94
IOC 495.05 509.25 2.86
BPC 362.8 375.85 3.6
HPC 277.95 318.5 14.6
RIL 1117.6 1271.4 13.76
SBI 930 1253.3 34.76
NTPC 124.2 141.95 14.3
BHEL 2260.95 2516.8 11.32
GMR Infrastructure* 214.6 372.65 73.65
Tech Mahindra* 539.95 1147.8 112.58 Suzlon 1203.35 1496.15 24.33
TCS 996.05 1144.15 14.87
Infosys Tech. 1808.8 2231.35 23.36
Adani Enterprises 119.8 183.8 53.42
Table 1 * Recent IPOs

As is clear the Sensex has moved up by a good 17% during this time. Any scrip which gives me return nearly equal to that of the Index return is good for investment prospects. That makes a good ‘hold’ of the scrip or otherwise I should think of ‘buy’ of that scrip.

The story starts here with a look at the returns of the ‘Oil majors’ in the mentioned period. IOC & BPC are giving very poor returns as compared to the other stocks. Only HPC has given returns which are comparable to that of the Index. Recent IPOs like Tech. Mahindra & GMR Infra. have given excellent returns over the same period. I would rather prefer these IPOs to HPC as they are characterized with high liquidity and volatility during their initial life after listing. Moreover, more than often the ‘Oil’ scrips have moved in opposite direction to that of the Index during intra-day trading. That makes my investment more vulnerable as normally I would like to gain with the growth of the Index i.e. Sensex. This renders my gains at a very slow pace as intra-day gains are hard to come by.

Table 2 shows P/E ratio of the Scrips under discussion. If there is one number that people look at more than any other it is the Price to Earning Ratio (P/E). The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. The Sensex P/E at 22 is not over-valued; it’s a good one for further investment. The giants like RIL, SBI have very good P/E values. Values as high as those of Software Companies is a common trend in the industry. Even others like NTPC, Adani, BHEL, Tech. Mahindra are good enough as an invitation for investors to park their money. Certainly GMR Infra. looks over-valued, however it also indicates that the market has high hopes for this stock’s future and that has bid up the price.

The lowest P/E values are those of the Oil Majors. The point is that low P/E values are a source of discouragement for the investors. This sends an indication that the investors don’t have much expectation from future earnings from these scrips. Certainly not a good sign for an investor having these scrips in his portfolio. Neither does this should invite fresh investors in these scrips.

P/E
SENSEX 22.51
IOC 6.7
BPC 11.1
HPC 7
RIL 18.6
SBI 16.7
NTPC 18.4
BHEL 31
GMR Infrastructure 100.8
Tech Mahindra 20.3
Suzlon 36.3
TCS 30.6
Infosys Tech. 40.3
Adani Enterprises 22.6
Table 2. As on Nov. 23, 2006 closing

Having said so far we should move a step ahead, let’s see the extreme levels of the Index & Scrips in last one year. Table 3 shows us by what amount the Index & scrips are lagging behind the highest levels and how much above they are from their lowest values recorded in the last 52 weeks. Sensex is trailing its 52 week high by a margin which is not that high. Such differences often come during Intra-day trading. Companies like RIL, SBI, NTPC, BHEL, GMR Infra. & others down the Table are almost touching their highest values recorded during trading. Tech. Mahindra shows the typical nature of a new IPO. Supported by a good P/E ratio, there is a lot of buying & selling activity associated with this scrip.
The problem again is with the Oil Majors. They are far away from their highest values. In this time when the market is taking new high values within a few trading days, it is not desirable for the Oil majors to miss the race. Certainly they are not a good game for investment. I would rather ignore such slow & steady gains when the market is already ripe to make quick bucks by investing in my favorite stocks.

23-Nov-06 52 Week High 52 Week Low
SENSEX 13680.83 13790.82 8655.14
IOC 509.25 622 310
BPC 375.85 503 291
HPC 318.5 361 206
RIL 1271.4 1316 580
SBI 1253.3 1263 684
NTPC 141.95 145 91
BHEL 2516.8 2552 1316
GMR Infrastructure 372.65 380 205
Tech Mahindra 1147.8 1214 521
Suzlon 1496.15 1510 739
TCS 1144.15 1175 728
Infosys Tech. 2231.35 2401 1225
Adani Enterprises 183.8 199 48
Table 3