India's Aditya Birla Sun Life Insurance (ABSLI) plans to increase its holdings in oil marketing companies as crude prices come under pressure and valuations in the sector turn attractive ahead of general elections next year.
"I think over the last five years we've seen a huge re-rating of these stocks and a very sharp correction as we approach the elections," Deven Sangoi, chief investment officer for equities at ABSLI, the life insurance arm of Aditya Birla Capital, told Reuters.
The S&P BSE Oil and Gas index has lost more than 20 per cent of its value since it touched a record high of 16,727.41 in November last year.
Oil prices have slumped by more than 30 per cent since early October, pressured by concerns supply will exceed demand in 2019 as economic growth slows. With US inventories rising, it slipped to below $60 a barrel on Wednesday.
Sangoi said he expected oil prices to remain between $50-$60 a barrel. Oil might even drop to $40 a barrel, if there is a demand shock due to a global growth slump, he added, potentially giving a boost to oil marketing companies' margins.
"If this oil call goes right, then I think oil marketing companies are a value," said Sangoi, who manages about 280 billion rupees ($4 billion) in equities out of ABSLI's 390 billion rupees of assets under management.
Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp are among the top oil marketing companies in India.
Sangoi's bet also hinges on the outcome of national elections due by May.
He said the current government had let oil marketing companies maintain their margins during a period of rising crude prices by passing the cost to consumers.
Opinion polls show Prime Minister Narendra Modi remains the front-runner to win another five-year term, but his Bharatiya Janata Party has suffered reverses in recent local elections that have energised the opposition.
Markets are looking now for cues from five key state elections in the next few weeks.
"If the Modi government comes back, then this sector will just go through the roof," Sangoi said.
He is also betting on power generating companies next year, as a pick up in economic growth boosts demand for energy.
"I'm a very firm believer that there is going to be very high growth in energy consumption if we continue to grow at 6-7 per cent," Sangoi said.
An increase in tariffs by the regulator and better capacity utilisation at power plants should also help these firms, he said.
Elsewhere, Sangoi said he expected private sector banks, especially those with corporate clients, to benefit next year as non-banking financial firms suffer from an ongoing credit crisis and bad loans, which have plagued lenders, continue to dwindle.