Down, but not out: Stocks of oil PSUs like Bharat Petroleum are slipping, but are still undervalued

If you are one of those lucky few who picked up Engineers India Ltd (EIL) early on this year at Rs 80, then you've either already earned five times what you invested or, if you missed its peak of Rs 401 in June, planning to kill your broker. For, the stock has been nervously fluttering in the Rs 310 to Rs 350 range. And with the Vajpayee government's ministers squabbling over disinvestment, the big investors are getting really jittery-not just over EIL, but most of the PSU stocks. Suddenly, it seems the government may not be selling its stake in these PSUs. Points out Dileep Madgavkar, Chief Investment Officer, ICICI-Prudential Mutual Fund: "The value of this sector depends on the government's commitment to strategic disinvestment. If that weakens, there will not be any significant upside to these stocks in the immediate future."

So what should a small investor like you be doing? Our advice: Stay invested (at least in the five short-listed here). For two good reasons. One, disinvestment is inevitable. Two, all the five operate in good sectors and have strong financials. Points out Sanjiv Prasad, Fund Manager, Kotak Securities: "Stocks like Bharat Petroleum and Hindustan Petroleum are still underpriced and, hence, attractive buys for the common investor." Here, we tell you what's good and what's bad about these stocks. Read on.

NALCO: White Gold

This 21-year-old company is the largest producer of alumina in India, and last year produced 9.39 lakh tonnes, with exports worth Rs 457 crore. Until recently, Nalco used to get a lower PE than its private sector peers, but the disinvestment talk has turned its fortunes around. The government has an 87 per cent stake, which will be lowered to 26 per cent in three stages. In the last nine months, the stock has more than doubled. Some analysts expect the stock to touch Rs 200-current price is Rs 105-when it goes under the hammer.

BHEL: Charged Up

Since 1995, the company has been increasing its dividend payout every two years. In 2000-01, it was a solid 30 per cent. But BHEL, one of the major power plant equipment manufacturers in the world, hasn't gained as much as the other PSU stocks. The reason? Explains Navin Aggarwal of Motilal Oswal Securities: "That's simply because it is not on the disinvestment list of 2002-03." But there is potential upside to the stock. It has an order book worth Rs 10,000 crore.

EIL: Intellectual Capital

A consultancy company like this one is ripe for picking. In fact, there's a long list of investors eyeing EIL, including ICICI Venture Fund and the Tatas. EIL is considered to be the top-most engineering consultancy company in the area of petroleum. It has executed a number of projects in the Middle and Far East. The firm, which has more than 3,000 engineers on its payroll, is highly profitable. On revenues of Rs 537 crore last year, it earned a net profit of Rs 81 crore prior to provision for investment losses. Currently, the company has projects worth Rs 646 crore on hand.

BPCL & HPCL: Looking Slick

Remember the fight for IBP? how indian Oil outbid Shell by nearly 100 per cent? Expect the fight for HPCL and HPCL to be meaner. Reason? The two companies are much bigger and of more strategic importance than IBP. BPCL, for instance, has 17.4 million tonnes per annum (TPA) of refining capacity and 4,500-odd retail outlets.

Similarly, HPCL has a refining capacity of 17 million TPA and 4,700 or so outlets. The cost of a greenfield refinery works out to at least Rs1,000 crore per million tonne, and the average cost of setting up a retail outlet in the metros is estimated to be around Rs 3 crore. Besides, there are some 30 different clearances that are required for opening a petrol pump. Do the math, and it is evident that building a company like BPCL would cost Rs 30,900 crore and an HPCL, Rs 31,100 crore. Compare this to their current market cap: BPCL is valued at Rs 8,650 crore and HPCL at Rs 9,650 crore-a gap of Rs 22,250 crore and Rs 21,539 crore, respectively. (Unlike Indian Oil, most of HPCL and BPCL's outlets are in cities.) That's what Prasad of Kotak Securities meant when he said the two stocks were still underpriced.

However, BPCL's refinery margins were lower last year. The company's net profits still rose from Rs 833 crore to Rs 850 crore because of oil pool claims. Its higher interest outgo is also another area of concern.

Similarly, HPCL's net profits in 2001-02 were down to Rs 788 crore, compared to Rs 1,088 crore the year before. But deregulation of petrol prices means that HPCL and BPCL now have the freedom to peg their prices to those of international crude. The bottomline: wait for the disinvestment to happen and then sell.