OMC earnings likely to rebound in Q2FY27, but crude volatility clouds full-year outlook: Emkay
New Delhi, September 9
Earnings of India's oil marketing companies are likely to rebound in the July-September quarter of FY27, supported by higher auto-fuel prices, improving marketing margins and lower LPG under-recoveries, but renewed volatility in crude oil prices could weigh on their full-year outlook, according to a report by Emkay Research.
The brokerage expects OMCs' integrated margins, which combine their refining and fuel marketing businesses, to improve significantly to around Rs 9-14 per litre in Q2FY27 from about Rs 1-3 per litre in Q1FY27, with HPCL expected to witness the sharpest sequential improvement.
"Marketing economics, however, have improved sequentially," Emkay said, pointing to the recovery in auto-fuel margins and the sharp decline in LPG under-recoveries.
Marketing conditions improved during the quarter after crude prices fell sharply in early July, with Brent crude touching around USD 68 per barrel before rising again to around USD 98 per barrel amid renewed tensions in the Middle East, the report said.
The full impact of auto-fuel price increases also supported marketing margins during the quarter, while losses on LPG sales are expected to decline significantly.
Emkay expects LPG under-recoveries -- the gap between the cost of supplying LPG and the lower market price at which it is sold -- to average around Rs 290 per cylinder in Q2FY27, compared with around Rs 510 per cylinder in Q1. The decline has been supported by lower Saudi contract prices, reduced spot premiums and the full impact of price increases, it said.
On the refining side, cracks have remained elevated amid refinery disruptions in Russia and the Middle East, with diesel margins particularly strong as outages have tightened product availability, according to the report.
The improvement in marketing profitability comes after a challenging first quarter, when higher crude prices, premiums and freight costs weighed on OMC margins. Strong refining margins provided some cushion, with Indian Oil and BPCL recording relatively resilient performance, while HPCL was impacted by operational issues at its Vizag refinery.
However, Emkay cautioned that the recovery in earnings remains vulnerable to further escalation of tensions in the Middle East and continued volatility in crude oil prices.
While the brokerage expects OMCs to report better performance in Q2FY27 compared with the previous quarter, the renewed rise in crude prices has weakened its full-year earnings outlook from earlier expectations.
The report also highlighted pressure on OMC balance sheets during Q1FY27 due to higher working-capital requirements resulting from elevated crude prices. As a result, the direction of crude prices is expected to remain a key factor determining the earnings trajectory of OMCs going forward.
— ANI
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