OMC stocks plunge 4-6% as markets crash 1%; brokerage suggests ‘sell’ on IOC, HPCL: Why are prices discounting?

livemint.com:

Hindustan Petroleum Corp Ltd (HPCL) faced selling pressure today amid a broader stock market crash driven by small- and mid-cap indexes that logged their worst session in over two years. Domestic brokerage firm JM Financials has maintained a ‘sell’ rating on IOC and HPCL and a ‘hold’ on BPCL amid the current discounting of prices.

OMCs’ valuations (HPCL 1.5x FY25 P/B; IOC 1.4x FY25 P/B; and BPCL 1.6x FY25 P/B) are trading at 25-50 per cent premium to historical valuations, according to the brokerage. ‘’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,'' said JM Financials. The brokerage expects gross refining margins (GRM) to normalise to $7.5-9 per barrel driven by the following:
-Normalisation of diesel cracks due to easing supply side concerns and normalisation of Chinese diesel exports
-End of windfall tax benefits following normalisation of diesel cracks
-Narrowing of Russian crude discount.