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Bonanza time for petro fund investors

Aabhas Pandya

It's bonanza time for petro fund investors. Buoyed by talks of divestment in public sector oil companies and sooner-than-expected dismantling of administered oil mechanism, the two petro funds of JM Basic and UTI Petro have posted an average gain of 20 per cent last month. The spurt in petro stocks and profit booking by fund managers has also facilitated dividend payouts. While JM Basic has declared two dividends in a month (25 per cent on December 29 and 50 per cent on February 3), UTI Petro had paid a 12 per cent dividend on December 27.

"The sharp rally in January helped us earn profits and declare a second dividend of 50 per cent (Rs 5 per unit) in just a little over one month," said Chandan Desai, fund manager, JM Basic. With the fund holding a large portion of its portfolio in cash for payout, it could gain only 14.71 per cent in January against a 25.3 per cent return by UTI Petro.

Going forward, the outlook is bullish on the sector. "The government is expected to dismantle the administered price mechanism or APM before the due date of April 2002. This will translate into pricing power for oil companies. Already, aviation turbine fuel has been freed," says an analyst. While a growing economy will keep the demand for petroleum and oil products strong, the clutch of PSU oil companies are expected to integrate with acquisitions and consolidate along the petroleum chain.

"The current players may not face much competition since the sector is highly capital intensive with large capacities. Add to it, a strong distribution network acts as a strong barrier although regulations have been eased over the years," says a fund manager.

The investor choice is currently limited to only two petro sector-dedicated funds while most diversified equity funds have a sprinkling of energy stocks, largely limited to the Reliance group companies. While the holdings of JM Bsic are not known, UTI Petro, with its small size of Rs 484.4 million is aggressively managed. The fund had a portfolio turnover of 840 per cent as on June 30, 2000, which means a holding period of just 43 days! The fund is concentrated with top eight stocks accounting for 90 per cent of the portfolio. Launched in June 1999, the fund has given a return of 40 per cent. The fund also holds some stocks like Infosys and Satyam since it can invest 10 per cent of its corpus in non-petro stocks.

Launched in 1997 with a corpus of over Rs 9.5 billion, JM Basic is one of the largest equity funds in the Indian mutual fund industry. And though the fund makes up for nearly 60 per cent of JM Mutual Fund, the fund's portfolio has never been disclosed by the asset management company. The fund has delivered an impressive return of 27.5 per cent since launch.

While investor choice is already limited with only two petro-dedicated funds, the minimum investment of Rs 100,000 in JM Basic is a further impediment for the retail investor. On the other hand, the minimum investment is only Rs 5,000 in UTI Petro.

Nonetheless, with the government control expected to go in the near future and the realignment in PSU oil companies, the two funds are an attractive investment opportunity. At the same time, UTI Petro scores over JM Basic for better disclosure standards and low minimum investment.

Source: Value Research

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