Oil marketing companies (OMCs) experienced a notable decline in share prices on Friday, March 15, with a decrease of 3-4%, indicating a reversal from the earlier rally witnessed earlier in the year due to stable crude oil prices.
The sell-off in shares of Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) was attributed to multiple factors. The government’s decision to reduce petrol and diesel prices by Rs 2 contributed to the downward pressure.
HPCL emerged as the day’s biggest loser, plummeting by over 6% to reach a low of Rs 468.55, while BPCL and IOC witnessed declines of up to 4% during Friday’s intra-day trading session.
Additionally, international crude oil prices surged by 2% following Ukraine’s attack on a Russian refinery, further impacting OMC stocks. High crude oil prices negatively affect OMCs due to increased costs associated with purchasing oil.
Brokerages on OMCs
Domestic brokerage firm JM Financials maintained a ‘sell’ rating on IOC and HPCL, and a ‘hold’ rating on BPCL, citing current price discounts. The firm’s analysis indicates that OMCs’ valuations are trading at a 25-50 per cent premium to historical levels, making their risk-reward profile unfavorable.
JM Financials recommends investing in upstream state-owned oil explorers such as ONGC and Oil India, citing their potential as plays on high crude prices and offering a 4-6 per cent dividend yield.
Furthermore, JM Financials’ valuation exercise reveals that at current market prices, IOC is discounting a sustainable Gross Refining Margin (GRM) of $9.5/bbl, BPCL is discounting $10/bbl, and HPCL is discounting $9.2/bbl.
This assessment considers OMCs’ historical strong GRM performance driven by various factors including record-high diesel cracks and windfall tax benefits.