UTI is unlikely to see heavy redemptions in US-64

The UTI, however, has been making encouraging noises in recent weeks, and there are indications that there is unlikely to be a wave of selling.

For starters, it is doubtful whether corporates will rush to redeem their units, as they would have to book a loss in their balance sheets, and nobody wants to do that.

For the UTI, it makes little sense to sell in January.

That's because the market expects UTI to sell, and the institution would have to sell its shares cheap. Far better to borrow from banks and other financial institutions to meet redemption pressures.

These borrowings could be secured against stock holdings.

Such a strategy would not only help the markets but would also improve US-64's NAV, which in turn would lead to lower redemptions. Also, foreign institutional investor flows are usually strong in the beginning of the year - another incentive to hold rather than sell.

Sure, the strategy has risks, but it is preferable to a course of action where redemptions force UTI to sell, forcing the market down, thus triggering a vicious circle of even more redemptions.

Disinvestment

Media reports indicated that the world's fourth largest oil company, Chevron Texaco, is planning to bid for the two PSU giants, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), as and when they come up for disinvestment. The company had already withdrawn from the race to bid for IBP.

No doubt, making a bid for a pure marketing company like IBP (with around 1500 retail outlets) is more promising than, say, bidding for a pure refining company, considering that refining margins are far lower than marketing margins, besides being highly volatile. However, Chevron does not have any refineries in the country.

Therefore, a successful bid for IBP would mean that Chevron will have no refining capacity of its own to support its marketing network and, therefore, the company will have to get into arrangements with the PSU giants, which it might find quite discomforting. Moreover, lack of infrastructure will prove to be a huge deterrent for imports.

Of course, Chevron could import, but the ports belong to the PSUs and the company may be quite uncomfortable with the arrangement, since their entry into India will be on a long-term basis.

In such a scenario, bidding for a stake in HPCL and BPCL is a far better proposition since they have a formidable marketing network, supported with refining capacities - for instance, BPCL has a refining-to-marketing ratio of nearly 1.

Moreover, both companies have around 4500 retail outlets (more than 3 times what IBP has) and in view of the impending deregulation, these companies have been making huge strides in their efforts to own them. Around 65 per cent of BPCL's outlets are company owned whereas the figure is around 55 per cent for HPCL.

What's more, both companies (especially BPCL) have been quite aggressive on the marketing front in an effort to improve non-oil revenues.

For instance, shopping in a convenience stores at a petrol pump may be alien to Indians but it is a way of life in the US and it is only a matter of time before this trend catches up here. Over the next 10 years, BPCL expects to achieve around 10 per cent in non-oil revenues.

Post the deregulation, marketing margins are expected to skyrocket - the one-time upside is expected to boost profit by more than 50 per cent.

According to analysts, BPCL will enjoy the highest sensitivity to any rise in marketing margins since it has a huge exposure to auto fuels. In addition, any improvement in pipeline tariff (although guidelines are awaited) will boost profits further.

Moreover, with the oil pool account getting dismantled, the working capital requirements will be lower, which in turn will reduce the debt burden and improve profitability of these companies.

Although a stake in HPCL and BPCL will be a huge positive, some analysts are doubtful whether these navratnas will ever be up for disinvestment.

Even if it did, what are the chances that it will be given to an international oil major?

But then again, where could one find a buyer in India besides Reliance Petroleum? The future clearly remains far from certain.

(With contribution from Satyan Nair)