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Oil hits $80 per barrel, and please buy Reliance Industries

Whoa. Oil prices are going to haunt us again. At $80 a barrel today this is one of the highest prices the world has seen. It’s going to hit two things: Oil companies like HPCL, BPCL etc. which must provide oil subsidies to you and me, and Airline companies, which don’t get subsidised fuel – Aviation fuel in fact is the most highly taxed of them all.

Meaning: these companies are a sell. Deccan aviation, Jet airways, HPCL, BPCL and IOC.

But buy Reliance Industries.

Why? Aren’t they also a sorta oil company? The short answer is yes, they are. Their refining margins seem to keep going up as crude prices increase! But they process heavy crude, a variety that is cheaper than the brent crude whose prices you see are high. The difference can be as much as $20 a barrel, as noted last quarter. Reliance and RPL are strong players here and will tend to make the best of it.

Secondly, they have made some interesting M&A news. They just bought HUALON, a Malaysian polyester company. RIL also acquired Gapco, a fuel retailer in Africa, for a retail AND storage foothold in Africa, plus trading abilities to other countries. RIL and IPCL have merged, and IPCL gets a P/E of 10 (RILs is about 24). The merger record date is Oct 5. And of course there is their retailing foray, their SEZ forays, a new healthcare foray they announced, RPL ownership etc.

Lastly, there is a certain accounting issue you need to be aware of. Everyone and their uncle was booking “foreign exchange gains” on loans taken from abroad last quarter – in fact companies like Tata Steel would have been terribly unimpressive had the rupee not fallen so much. Reliance, which had a gain of 300 cr., has not taken it on its books, saying instead that it will not take it. The gain will come in sometime this year, if the rupee stays low, and this gain is something that’s unreflected in it’s EPS reported figures. It’s a small sum perhaps – but it accounts for 10% of their quarterly profits – and this quarter, there will be ANOTHER 300 cr. or so as the dollar stays low. Tehcnically, that means nearly 20% of their quarterly profit is just sitting there waiting to be accounted – something we all can take advantage of.

Disclaimer: I hold this stock. I had recommended first in December 2005, and recommended a “hold” in March 2006, with a target of 1200 in August. I’m now saying hello to this stock again.

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