Oil marketing companies’ (OMCs) strong March-quarter (Q4FY26) results hide the heavy losses they are incurring due to higher crude oil prices. Brent crude now trades over $100 per barrel, up from about $70 per barrel before the West Asia war began.
Efforts to soften the blow are still not enough to cushion the impact of crude price surge. The government reduced excise duty on petrol and diesel by ₹10 per litre on 27 March. It has also allowed two price increases over the past week, totalling about ₹4 per litre. Against this backdrop, OMCs: Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL), and Hindustan Petroleum Corp. Ltd (HPCL), are projected to see substantial under-recoveries (losses on selling fuel below market prices) in the ongoing Q1FY27 (versus nil in Q4FY26).
Apart from auto fuels, OMCs’ cost of procurement of LPG has also increased sharply to about $1,000 per tonne, against $520 per tonne before the war, as per a 17 May Nomura Global Market Research report. The three OMCs have reported a jump in under-recoveries to ₹670 per LPG cylinder in May versus ₹170 in April, and about ₹80 in Q4FY26.
JM Financial Institutional Securities estimates India’s import bill to rise sharply by ₹1.6 trillion in Q1FY27 at $110 per barrel of Brent crude, compounded by the sharp rupee depreciation. Out of this, ₹33,500 crore is expected to be borne by the government, ₹9,000 crore by refiners, ₹35,000 crore by consumers, and the remaining ₹84,500 crore by OMCs.
“This implies potential for ~10% erosion in OMCs’ book value by end-Q1FY27E; however, OMCs have balance sheet strength to absorb current quarterly under-recoveries for two–three quarters (current net debt-to-equity comfortable at ~0.52x versus 1.16x during Russia crisis),” said JM’s analysts in a 18 May report.
But OMCs may get some more relief as the huge anticipated under-recoveries may mean further price hikes in retail petrol and diesel prices can be expected. Recall that retail prices were increased by ₹10 per litre in 2022, in response to the flare-up after the Russia-Ukraine war.
For now, OMCs’ integrated margin (refining plus marketing) for Q1FY27 is expected to be sharply lower versus historical averages.
In Q4FY26, IOCL and HPCL clocked 53-55% year-on-year Ebitda growth to ₹20,700 crore and ₹8,980 crore, respectively. BPCL’s Ebitda grew by 34% to ₹10,000 crore. Earnings got a boost from inventory gains on cheaper crude purchased before the war being valued at current market price, and 3-6% higher sales volumes. Last quarter, HPCL commissioned its residue upgradation facility at its Vizag refinery, which should improve its margin by $2 per barrel from Q2FY27. IOCL is expected to complete its three refining expansion projects by FY27-END, raising its capacity by about 17 million tonnes per annum (mtpa) to 98 mtpa.
Shares of OMCs are down 11-25% since the outbreak of the war, though there is little comfort on valuations. Nomura noted that despite a sharp dip in fuel marketing margins to ₹25 per litre and highest-ever LPG loss at ₹680 per cylinder, OMCs are trading at a premium to the valuations seen during the early period of the Russia-Ukraine war. Any breakthrough in the ongoing war, enabling the opening up of the Strait of Hormuz could come as a big relief to OMCs.