Today, when MRPL surged 17% like a rocket stock, Amar Ambani of IIFL and a few other savvy stock pickers had a wide smile on their faces.
Their confidence in MRPL had been redeemed.
MRPL has been weighed down by colossal losses due to its’ long-delayed refinery expansion. Nobody wanted to touch the stock with a barge pole. However, a few savvy analysts had dared to look ahead into the future and correctly predicted that the sentiment around the stock would change once positive news regarding the completion of the refinery started trickling in (See Why Is Everyone Making a Bee-Line For MRPL Now?)
Amar Ambani’s timing was perfect. He sent out a buy call in December 2013 when the stock was at Rs. 41 and promised a price target of Rs. 51 (gain of 22%).
When that price target was reached on 13th April 2014, Amar Ambani was quick to issue a release (pdf) advising investors to stay put in the stock for a higher price target of Rs. 55.
At the CMP of Rs. 64, the total gains is a fabulous 56% for just a couple of months holding.
The larger issue is about MRPL’s medium to long-term future prospects. On paper, MRPL has a bright future ahead of it. The increase in the Nelson complexity of the refinery to 10 means that it can buy cheaper crude and refine it into products with higher Gross Refining Margins (GRMs). Also, being a subsidiary of ONGC means that it has strong financial and managerial muscle.
However, the downside of being a PSU in a sensitive activity means that there is a great risk of Government interference in the pricing of the product. MRPL will sell the refined products to the OMCs like IOC, BPCL and HPCL. The OMCs are reeling under losses and ONGC & Oil India are subsidizing them. How easy will it for the Government to say that MRPL should also share the burden of subsidy?
If that happens, the euphoria surrounding the stock will evaporate.
In these matters, it may be better to err on the side of caution, especially when there are several other promising opportunities available.
So, I propose that investors in MRPL should keep an alert and cautious look out, read up all the opinions on the subject before deciding the future course of action.