This Is  An Early ‘Alarm Bell’ For Oil Refiners, According To  CLSA’s Vikas Kumar Jain
A fire alarm sign at an office in Mumbai. (Photograph: BloombergQuint)

This Is An Early ‘Alarm Bell’ For Oil Refiners, According To CLSA’s Vikas Kumar Jain

Oil refiners and marketers could face a challenging quarter on the back of “very bad” supply-demand situation and poor margins.

That’s according to Vikas Kumar Jain, investment analyst at CLSA. “Also, a lot of Indian players did underperform the Asian benchmark Singapore gross refining margin which is an early alarm bell sign of things to come,” he told BloombergQuint in an interaction.

The refining margin—what oil marketers earn for processing every barrel of crude into fuel—for Indian firms fell for the second straight quarter led by losses or lower on inventory gains as crude oil prices declined during the quarter.

The only positive for refiners was the International Maritime Organization’s change of rules aimed at reducing pollution, Jain said. Ships from January are required to use fuel oil—a residue of petrol, diesel and jet fuel—with a sulphur content of less than 0.5 percent compared with the existing 3.5 percent. That’s expected to benefit refiners as they have already started producing low-sulphur fuel.

The brokerage firm maintains ‘Sell’ rating on oil marketers as their valuations are among the most expensive globally, Jain said, adding global investors may prefer cheaper foreign stocks even if the IMO rule tweaks drive benefits.

Other highlights from the conversation:

Government Offloading Stake In OMCs

  • Privatisation of oil marketers comes at a time where global investors are staying away from refining assets.
  • Unsure whether privatisation could be completed within the current fiscal.

On City Gas Distribution Firms

  • The firms have benefited from lower tax rates and higher margin due to gas price cuts.
  • There is clear compounding growth foreseen in earnings and consistent volume growth.


  • The stock is trading sub-five times its price-earnings multiple compared to its historical average of 11 times.
  • Government’s ETF divestment strategy has created an overhang on the stock.
  • Improvement in crude oil prices and a few new gas fields starting operations next year should trigger an upside.
  • Investors should prefer cheaper exploration and production firms over most expensive OMC firms.
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