Oil Marketing Companies – Transformation from long term market underperformers to super out performers

CO.NAME	2003 May	2010 Aug	CAGR
RELIANCE	144	976	30.2%
ONGC	295	1282	22.5%
IOC	110	404	19.7%
BPCL	240	774	17.5%
HPCL	290	536	8.8%
BHEL	127	2501	50.8%
SBI	337	2822	34.1%
PNB	164	1198	31.6%
GAIL	68	464	30.3%
NIFTY	973	5452	26.8%

The above table shows the performance of Nifty Index and some large cap stocks over the last 7 years, ever since the bull market started in the middle of 2003. A distinct underperformance has come in from the various public sector companies in the oil and gas space. The underperformance is even more pronounced in the case of Oil Marketing Companies. Compared to the private sector oil and gas behemoth Reliance as well as the other public sector companies like BHEL, SBI, PNB and even GAIL, the Oil Marketing Companies – IOC, BPCL and HPCL have underperformed considerably. With the subsidy regime gradually getting dismantled we can expect this gap in underperformance to gradually narrow down. Keeping in mind that the long term average growth rate of Oil Marketing Companies are not going to be significantly less than the general economic growth rates, it will be fair to assume that from here on these companies can be expected to outperform the indices for the next several years. In our opinion this catch up should happen over the next couple of years. For IOC, BPCL and HPCL to match Nifty Returns of over 26% in the next few years, their shares will have to generate more than 30% returns from here. This along with various other fundamental arguments makes it imperative for long term investors to include IOC, HPCL and BPCL in their portfolios.