India refiners boom amid oil bust as investors eye risks

Oil’s slump has almost doubled the value of India’s big, state-owned refiners, outpacing the rest of the industry from China to the U.S.

The companies had been forced to make a large proportion of sales at below cost for over a decade. Now, they can profit from fuels after India’s new government saw its opportunity in falling oil prices to deregulate the market without bothering its inflation targets. OPEC’s decision to sit on its hands in the face of an oil glut has only accelerated share gains.

India’s big three state refiners – Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. — are up 53 percent, 84 percent and 131 percent respectively over the year to Dec. 24. Hindustan Petroleum is the best performing oil stock in the world. For comparison, Asia’s biggest refiner, China Petroleum & Chemical Corp., is down 1.4 percent, while the largest U.S. processor, Phillips 66, has lost 6.5 percent.

Whether India’s refiners can maintain their tear will depend on the constancy of politicians and markets. In the meantime, there’s a new-found freedom to make money.

“The fuel price deregulation definitely has both an immediate and long-term impact on the Indian refiners,” said Indian Oil’s Finance Director Arun Kumar Sharma. “It improves cash flows and gives a sense of more flexibility.”

India’s refiners have to mostly import their oil to turn it into petroleum products. In the case of diesel, which accounts for almost half the fuels consumed in India, the selling price was below the cost of production to deliver on a government mandate to keep energy cheap and inflation low. That changed in October, when the government ended price controls.

The companies continue to sell cooking fuels such as kerosene and liquefied petroleum gas below cost, in a country where about a third of its 1.2 billion citizens live on only a few dollars a day.

The global refining industry has done better from oil’s slump than other energy businesses because of lower input costs.

Oil prices at a five-year low are presenting India’s newly elected Prime Minister Narendra Modi with the prospect of rising growth even as China slows. Inflation has eased, the current account deficit has narrowed, and Modi is winning plaudits for pro-business policies after years of stagnation.

Still, some investors think India’s refiners, their profits dependent on government policy, could already have seen the best of their run.

“There aren’t any fresh triggers now to take it to the next step,” said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. in Mumbai, which oversees about $150 million. “There are no immediate and short-term catalysts for the shares. What exists now are some other risks.”