Why some experts still see some steam left in MRPL, Chennai Petro shares

Oil prices have extended gains today due to robust demand in the world's top consumer US. Price Oil prices will also go up as demand is expected to rebound in China, with COVID-19 restrictions easing.

Brent crude futures for August rose 50 cents, or 0.4 percent, to $124.08 a barrel by 0153 GMT, while U.S. West Texas Intermediate crude for July was at $122.49 a barrel. On Wednesday, both benchmarks closed at their highest since March 8, matching levels seen in 2008.

Most banks and brokerage firms believe that prices will climb higher from hereon for this quarter and the next, with Goldman Sachs and Trafigura pegging the price at $140-150 per barrel.

A measure that offers comfort to the oil refiners is Singapore Gross Refining Margin (GRM), an Asian benchmark for profitability for oil refiners. GRM is the amount that refiners earn from turning every barrel of crude oil into refined fuel products.

Oil extends gains on US demand, China optimism

The rise in the Singapore GRM to a record high of $25.2 per barrel bodes well for Indian refiners as they process raw crude into refined products.

“From an average of $8 per barrel during the first quarter of CY22, GRMs are currently at $25 levels. Such a steep increase within a short period has turned out to be a strong tailwind for refining companies,” said Nirav Karkera, head of research at Fisdom.

GRMs are at an attractive level, and Karkera felt standalone refiners like CCPL and MRPL would benefit a whole lot more than refining plus marketing players where, at times, greater refining margin simply offsets the impact of subdued marketing margin.

Market participants expect the Singapore GRMs to remain range-bound at elevated levels, keeping the earnings outlook for MRPL and CPCL "as bright as the sun".

With the seasonal uptick in demand for processed energy, above-capacity processing, higher prices and robust GRMs, stock prices have witnessed a significant uptick in a relatively short period.

“However, the uptick seems to have captured the tailwinds presuming sustenance over a short to medium term. Any development on the key parameters affecting the GRM like the geopolitical crisis or a change in demand dynamics could trigger an immediate impact on prices of refining companies' shares,” said Karkera.

He believes that the visibility of GRMs sustaining at higher levels could drive the share price of oil refiners even higher, factoring in sustained earning expansion over the medium to longer term.

Reena Shah, an equity research associate at Elara Capital, is also of the view that a sustained higher GRM is still not yet baked in, in the share price of both MRPL and CPCL.

Shah said that if the average GRM is around $20 per barrel this quarter, MRPL can easily make an EBITDA (earnings before interest, tax depreciation and amortisation, another measure of profitability and a gauge of the financial health of a company) of Rs 4,400 crore in the first quarter of FY23, which is a historic high. She believes this kind of performance has been discounted in the recent rally.

Shares of MRPL have been gaining for the past five days and have rallied 50 percent during the period, while CPCL’s stock has been rising for the past five days and is up 30 percent during the period.

Buying traction was also seen in Reliance Industries (RIL) on the back of the rise in Singapore GRMs. Oil India has also seen some uptick. RIL shares rose about 10 percent in the past month, whereas Oil India stock was up 28 percent.