Earnings of OMCs seen weak as Q1FY27 under-recoveries bite: Report
New Delhi, June 21
Oil marketing companies are likely to stay under pressure through FY27 as Q1FY27 under-recoveries will weigh on profitability and the risk of excise duty rollback remains, domestic brokerage firm Prabhudas Lilladher said in a recent research report.
The firm said that the near-term sentiment has improved after Brent crude dropped below USD80/bbl on the US-Iran ceasefire, but persistent volatility in prices and inventory rebuilding are expected to limit further downside, keeping margins compressed.
The brokerage firm said Q1FY27 is expected to weigh sharply on profitability despite the recent respite. "We expect an under-recovery of Rs7.0/ltr and Rs10/ltr in Q1FY27, after considering a Rs10/ltr excise cut and capping of cracks at USD10/bbl and USD15/bbl for MS and HSD respectively," the report noted. LPG continues to remain the biggest pain point, with losses estimated at around Rs500/cyl for Q1FY27. As per Q4FY26 concall commentary cited by PL, OMCs reported LPG under-recoveries in the range of Rs610-670/cyl in May 2026 vs ~Rs170/cyl in April 2026. Saudi CP prices for Q1FY27 are expected to increase by 47 per cent QoQ, driven by supply constraints due to the West Asia disruption.
The brokerage said the rollback of excise duty remains a key risk for earnings of the companies. "The overhang of a rollback in excise duty cuts of Rs10/ltr remains a key pressure point for OMCs, although the rollback is expected to happen in a phased manner," PL Research said. The excise cut was introduced as a crisis management measure rather than a permanent change, and with crude moderating and retail price hikes implemented, the government may gradually withdraw the benefit. The government continues to bear a revenue impact of ~INR1700bn per year from the excise cut.
On crude, the brokerage expects near-term decline but volatility to persist. "If the US-Iran situation progresses positively and full normalcy is restored at the Strait of Hormuz, crude prices may soften further. However, we expect crude oil prices to rise again as countries are expected to replenish inventories and SPRs to maintain optimum resource levels, creating incremental demand in the market," the report said.
Iranian oil exports are expected to resume immediately, but countries that utilised strategic petroleum reserves during the conflict are likely to begin replenishing stocks, providing support to prices.
— ANI
Reader Comments
While I understand the need to manage OMC profitability, the common man is already struggling with inflation. The excise cut was a welcome relief, and rolling it back now would hurt households already dealing with high LPG cylinder prices (Rs500 loss per cylinder is huge!). The government should find other ways to balance revenue rather than passing it on to consumers. 🙏
Good analysis from PL. The key takeaway for me is that OMCs are caught between global crude volatility and domestic pricing pressures. The Rs1,700bn revenue impact of the excise cut is unsustainable long-term, but the phased rollback approach makes sense. Also, the note about inventory rebuilding post-conflict is spot on - we'll see crude prices firm up again once SPR replenishment starts globally.
As someone who works in the energy sector, I find these projections quite realistic. The US-Iran ceasefire is a positive development for short-term sentiment, but the supply chain disruption from West Asia will keep margins compressed for at least another quarter. LPG under-recoveries of Rs500-670 per cylinder are really worrying - that's going to hit rural households hardest. 😔
I've been an OMC investor for years, and this report captures the current dilemma perfectly. The excise cut was necessary during the Ukraine crisis, but it's been over two years now. The government needs to communicate a clear roadmap for phasing it out - maybe link it to crude price bands so that when Brent is below $75, the cut is gradually withdrawn. Simple ad-hoc rollbacks will spook markets unnecessarily.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.