Why Samir Arora went against his investment philosophy for this company in 2023

saumyasingh July 5, 2023

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Why Samir Arora went against his investment philosophy for this company

Renowned fund manager Samir Arora recently revealed in an exclusive interview with Moneycontrol on July 5 that he has invested in the state-owned oil refining and marketing company HPCL (Hindustan Petroleum Corporation Limited). Arora cited the incredibly cheap valuations as the primary reason for his investment decision. At the time of the interview, HPCL’s stock was trading nearly 2 percent higher at Rs 283.60.

Arora explained that he was prompted to buy HPCL based on a comment from one of his analysts, who highlighted the company’s significantly low market capitalization compared to other companies. In fact, the market capitalization of HPCL was lower than that of Zomato, a popular food delivery platform. Arora had previously invested in Zomato when the stock was trading around Rs 50 levels, with a market capitalization of approximately Rs 40,000 crore. Currently, Zomato’s stock is priced at Rs 74, with a market capitalization of Rs 62,000 crore. On the other hand, HPCL’s market capitalization stands at Rs 40,000 crore at the current stock price of Rs 284.

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Arora’s investment in HPCL demonstrates his confidence in the company’s potential and the belief that its valuations present an attractive opportunity for investors. By investing in a state-owned oil and gas company like HPCL, Arora positions himself to benefit from potential growth and value appreciation.

It is worth noting that investment decisions are subject to market risks, and the performance of a stock can vary over time. Arora’s investment strategy is based on his analysis and assessment of the market conditions and specific companies.

As the market evolves, it will be interesting to observe the performance of HPCL and how its valuation compares to other companies in the industry. Arora’s investment decision in HPCL underscores the importance of conducting thorough research and analysis while evaluating investment opportunities, taking into account factors such as valuations, growth potential, and market dynamics.

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In the fiscal year 2022-2023 (FY23), Zomato reported sales of Rs 7,079 crore and a net loss of Rs 970 crore. On the other hand, HPCL recorded revenue of Rs 4,40,000 crore but incurred a net loss of Rs 9,471 crore. Despite the significant revenue generated by HPCL, the company faced challenges in achieving profitability.

One of the reasons for the losses incurred by oil refining companies like HPCL is the lack of full flexibility in pricing petrol and diesel. When crude oil prices rise, these companies are unable to pass on the entire cost increase to consumers, leading to losses. Additionally, they also incur losses on subsidized products such as Kerosene.

However, the situation may change for HPCL and other oil refining companies this year. Although crude oil prices have settled at lower levels, petrol and diesel prices have been maintained at higher levels. This scenario creates an opportunity for companies like HPCL to generate profits, as they can potentially benefit from maintaining higher prices while the cost of crude oil remains relatively lower.

Samir Arora’s investment in HPCL indicates his belief that the profitability equation for the company could improve in the coming years. The stabilization of crude oil prices and the maintenance of higher petrol and diesel prices offer a favorable environment for oil refining companies to enhance their profitability.

It is important to note that the profitability of HPCL and the oil refining sector as a whole is subject to various factors, including global crude oil prices, government policies, and market dynamics. Investors and analysts closely monitor these factors to assess the potential profitability of companies like HPCL.

While Arora sees the profitability equation changing for HPCL, it remains to be seen how the company will navigate the challenges in the oil refining industry and work towards achieving sustained profitability. Investors will continue to monitor the performance of HPCL and assess the impact of various factors on its future profitability and market value.

Arora’s decision to invest in HPCL, a state-owned oil and gas company, contradicts his usual investment philosophy. He typically avoids investing in state-owned companies that often face challenges in maintaining market share against more agile private players and businesses with significant regulatory components. However, Arora believes that the current conditions have created a favorable environment for oil companies.

While refining companies have struggled in the past year, Arora sees a positive outlook for oil companies as the government allows them to retain profits by not reducing prices. This shift enables companies like HPCL to benefit from declining crude oil prices while maintaining higher prices for petrol and diesel.

Analysts also anticipate a strong fiscal year 2023-2024 (FY24) for Indian oil refiners and gas companies as crude oil prices have significantly declined from their 2022 highs. State-run oil refining companies are expected to experience higher marketing margins, while domestic brokerage firm ICICI Securities is optimistic about Oil Marketing Companies (OMCs) due to steadier gross refining margins (GRMs) and stronger marketing margins. Upstream companies are also predicted to benefit from realizations of at least US$75/bbl over FY24-25E.

Arora emphasizes the importance of maintaining a flexible mindset when it comes to investment success. By investing in stocks with incredible growth potential alongside those with attractive valuations, he aims to achieve a balanced investment strategy.

However, it’s important to note that investing in the stock market carries inherent risks, and the performance of any investment is subject to various factors. Investors should conduct thorough research, consider their risk tolerance, and consult with financial professionals before making investment decisions.