High oil prices could boost these Indian stocks, Morgan Stanley says

Published Wed, Jul 7 202112:27 AM EDTUpdated Wed, Jul 7 202112:46 AM EDT

High energy prices tend to be bad news for India, which buys more oil than it sells. But the tighter market could actually be good news for India's energy stocks due to two trends, according to Morgan Stanley. An increase in diesel margins and a shift to gas are two trends that could be a boost for oil refiners and gas distributors, the investment bank's analysts said in a research note. "We see oil marketers and refiners, which benefit from improving diesel/jet fuel margins, as keys to play tighter oil markets," the analysts said. Higher crude prices may also prompt customers in India to switch to gas, according to the June 24 note. Brent crude was near flat at $74.57 per barrel on Wednesday morning in Asia, while U.S. crude was 0.12% higher at $73.47. Oil prices have been higher because of increasing demand, but also more volatile after a disagreement within energy alliance OPEC+. Morgan Stanley's "key picks" are stocks with access to new markets, and are upgrading their products and unwinding debt. Trend 1: Increase in diesel margins Oil markets are performing well in part due to increasing global mobility as a number of countries return to some level of pre-pandemic life. Energy demand is recovering at a time where the refining industry's capacity is 3% to 4% lower than before, following a global consolidation, Morgan Stanley said. "We see demand recovery in air travel having a second derivative effect to an improvement in diesel margins," analysts wrote. Morgan Stanley says these stocks could benefit from this trend: Hindustan Petroleum : Price target of 363 Indian rupees, an upside of 19.2% as of Tuesday's close. Bharat Petroleum: Price target of 480 Indian rupees, upside of 4.8% Reliance: Price target of 2,262 India rupees, upside of 6.5% Hindustan Petroleum (HPCL), Reliance and Bharat Petroleum are "key picks" because "half of the refinery product output benefits from normalization in diesel margins, which we expect to double by 2022," the note said. Hindustan Petroleum refines crude oil and markets petroleum products. For HPCL specifically, consolidation in refining markets, hardware upgrades, improved capital efficiency and increased investments in enabling the energy transition can support the quality of its returns. Its margins could double as capacity rises around 40%, and return on capital — which measures a company's profitability and how efficiently its capital is employed — could average 15% over the next three years. "These factors combined should drive HPCL's earnings to outperform global peers … as (the) refining upcycle takes shape," the note said. Trend 2: Growing adoption of gas More customers may choose to use gas if oil prices remain high, and that will support growth and margins as India's production rises, the investment bank said. Morgan Stanley says these stocks could benefit from this trend: Gujarat Gas: Price target of 733 Indian rupees, upside of 9.4% as of Tuesday's close. GAIL: Price target of 165 Indian rupees, upside of 9.7% Indraprastha Gas Limited: Price target of 605 Indian rupees, upside of 7.5% Gujarat Gas buys, sells, transports and distributes natural gas. "We see Gujarat Gas benefitting from better pricing power for industrial sales, expanding (the total addressable market) from ceramics and chemical segments, higher penetration of gas sales for transportation, and upside from improving domestic gas supplies," the investment back said. It added that rising gas production in India is coinciding with Gujarat Gas' expansion. The bank estimates a 22% compound annual growth rate from 2021 to 2024 due to factors such as increasing compressed natural gas demand and new chemical companies in the Indian states of Gujarat and Maharashtra looking to switch to gas. "These factors should drive earnings to double in the next three years," it said. Disclosure: Morgan Stanley owns 1% or more of Reliance Industries shares.

A man holds a petrol nozzle in a petrol pump in Kolkata, India, 03 July, 2021.

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