The high crude oil prices and a shortage in refining capacity are forcing the Street to have a closer look at the gross refining margins of domestic refiners.

The GRMs have been high globally as several refining facilities in East Asia have been shut over the past few weeks on account of maintenance activities.

Analysts at domestic brokerage houses are estimating the GRMs of Reliance Industries [Get Quote] at $14-$15 a barrel compared with the regional benchmark Singapore refining margin of $8 a barrel last month.

RIL is doing better than the regional benchmark due to its ability to process heavy and sour crude, coupled with the higher product prices of petroleum products in the overseas markets. The company's GRMs were $13.6 a barrel in Q2 FY08.

Public sector oil marketing companies such as HPCL [Get Quote] and BPCL [Get Quote] are also understood to be leveraging this upturn, with estimated GRMs of $7-$8 a barrel. HPCL's gross refining margins at its Mumbai refinery were $6.26 a barrel in the first half of FY08.

However, the oil marketing companies are grappling with under-recoveries on the auto fuels, kerosene and LPG front due to the government's reluctance to hike retail prices.

At the end of the first week this month, under-recoveries of diesel were estimated at Rs 8-Rs 9 a litre, according to analysts. The upstream oil players such as ONGC [Get Quote] and Gail are expected to partially share these under-recoveries through the subsidy sharing formula.

RIL trades at 30 times estimated FY08 earnings and 23 times FY09 earnings due to its expansion plans in oil exploration and retail. BPCL, on the other hand, gets a discounting of 9 times estimated FY08 earnings and 9.5 times FY09 earnings, given the uncertainty regarding its subsidy burden.

Sugar companies: Sweetening effect

Sugar stocks have been in the limelight over the past few days on expectations that the UP government may reconsider sugarcane prices for the 2006-07 sugar season.

The sugarcane State Advised Price, which was fixed at Rs 125 a quintal, was reduced to Rs 110 in November and is likely to be lowered further. This would strengthen the margins of sugar companies.

The market is also factoring lower sugar cane prices in the 2007-08 season. Industry estimates put a ballpark SAP figure at Rs 85 a quintal and a conversion cost of Rs 350-400 a quintal for the sugar companies to break even at current sugar prices.

However, that price level seems unlikely as it would not be favourable for the farmers. On the back of rising input costs and falling realisations, the domestic sugar companies are incurring losses. To cope with higher cane prices, companies are resorting to cogeneration and ethanol.

According to analysts, the international sugar prices will remain subdued. On the other hand, the contrarian set finds the current situation favourable for buying sugar stocks. As a result of falling sugarcane prices, farmers are likely to divert to other crops resulting in lower production and better sugar prices.

With contributions from Amriteshwar Mathur and Jitendra Kumar Gupta