Shares of government-owned oil marketing companies (OMCs) have been down 6-9% since 30 July in the backdrop of the US imposing additional tariffs on India due to the import of discounted Russian crude.
However, as Emkay Global Financial Services points out, the impact on overall gross refining margins from the Russian crude discount should not be very significant sequentially in the September quarter (Q2FY26), and the discount was just about $1.5 per barrel, as per the management commentaries.
Plus, stocks of OMCs—Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—could find support amid the recent government decision to reimburse ₹30,000 crore against under-recoveries on the sale of domestic LPG, and solid Q1FY26 results. The combined FY25 under-recovery of the oil retailers was ₹41,300 crore. These companies supply LPG cylinders at regulated prices to consumers, with the government paying the difference.
Note that the LPG loss compensation approval may not mean immediate cash flow relief, as the timeline is uncertain and the mode of payment is staggered. Some expect marketing gains aided by the drop in crude oil prices to bring comfort.
As per J.M. Financial Institutional Securities, OMCs had earned ₹25,000-30,000 crore extra on their automotive fuel margin in FY25. The margin has increased further in Q1FY26, but risks linger.
“We believe OMCs’ integrated refining cum marketing margin will normalise around historical levels as the government may retain the benefit of any sustained fall in crude price via excise duty hike and/or fuel price cut,” pointed out JM Financial. Brent crude was $67 per barrel in Q1FY26 versus $85 in Q1FY25 and $75 in Q4FY25.
Margin relief
For now, the OMCs are enjoying the bonanza from the unchanged retail prices. The aggregate Q1FY26 standalone Ebitda of these companies increased 82% year-on-year. While gross refining margin fell to $3.4 per barrel from $6.4 a year ago, this was more than offset by the sharp rise in marketing margin by 110% and 70% on petrol and diesel, to ₹12.7 per litre and ₹7.3.
IOC’s Ebitda rose 46% year-on-year to ₹12,600 crore, yet below estimates, thanks to inventory losses of ₹6,500 crore as oil prices dropped. BPCL’s Ebitda rose by 71% to ₹9,700 crore, while HPCL reported the highest Ebitda growth of 260% to ₹7,600 crore, with 16% growth in throughput, lower base and efficiency gains.
OMCs are undertaking significant capital expenditure (capex) for refining and petrochemicals capacity expansion. IOC is expected to commission three projects, raising its capacity by 18 million metric tonne per annum (mmtpa), about 25% of its existing capacity, in the next 12 months.
HPCL’s 9 mmtpa Barmer refinery’s first section is likely to commence soon, with 88% of the project completed by Q1-end. BPCL’s expansion projects are expected to come onstream FY28 onwards, with total capex of about ₹1.5 trillion to be spent over the next five years.
Despite potentially better margins and a higher share of petrochemical products, the impact of capex on financials needs closer monitoring. “OMC capex is expected to be elevated given its long-gestation projects, pressuring return ratios in the near term,” says Nuvama Institutional Equities. BPCL management has projected its debt-to-equity ratio at 1.0x by FY28, up from 0.4x now.
Notwithstanding the recent weakness, shares of OMCs have gained 27-36% from their 52-week lows seen on 3 March. IOC trades at 0.97x its FY26 estimated book value, while BPCL and HPCL trade at 1.4x each, as per Bloomberg. Investors should watch out for any government intervention denting margins, besides the crude price movement.
