Oil marketing companies’ (OMCs’) stock prices are down 4.6 percent from their all-time highs on Wednesday, March 13, suggesting that the early-year surge in the market is tapering off. Amidst a wider stock market meltdown propelled by small- and mid-cap indices, shares of Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) were under selling pressure today.
The brokerage claims that the OMCs’ values (HPCL 1.5x FY25 P/B, IOC 1.4x FY25 P/B, and BPCL 1.6x FY25 P/B) are trading at a 25–50% premium to historical valuations.
‘’Hence, we believe OMCs’ risk-reward is unfavourable and we maintain our SELL rating on IOC and HPCL and our HOLD rating on BPCL. We instead prefer upstream PSUs (ONGC/Oil India) as they are a play on high crude price, with CMP discounting ~$65/bbl net crude realisation, and have 4-6 per cent dividend yield,” stated JM Financials.
Reasons why OMC stock prices are falling?
The brokerage believes that gross refining margins (GRM) will stabilize to $7.5–9 per barrel due to the following factors:
- The normalization of diesel cracks due to a decrease in supply-side concerns and the resumption of Chinese diesel exports
- Reduction of specific tax benefits upon increased prevalence of diesel cracks
- The discount on Russian crude is decreasing.
