OMC Earnings Face Pressure Due to Q1FY27 Under-Recoveries

Oil Marketing Companies (OMCs) in India are bracing for a challenging fiscal period as significant under-recoveries are expected to squeeze profitability in the coming quarters. While recent drops in Brent crude prices have offered some temporary relief, structural headwinds and regulatory risks continue to cloud the outlook for the sector.

The Impact of Under-Recoveries in Q1FY27

According to a recent research report by domestic brokerage firm Prabhudas Lilladher (PL), the profitability of OMCs is expected to face a sharp decline in the first quarter of FY27. The report highlights significant under-recoveries that are set to weigh heavily on margins. Specifically, the brokerage expects under-recoveries of ₹7/ltr for Motor Spirit (MS) and ₹10/ltr for High-Speed Diesel (HSD). These projections account for a ₹10/ltr excise duty cut and a capping of cracks at USD 10/bbl for MS and USD 15/bbl for HSD.

LPG remains a primary area of concern for the industry. Losses in the LPG segment are estimated to reach approximately ₹500/cylinder in Q1FY27. This follows a period of extreme volatility where LPG under-recoveries climbed from roughly ₹170/cylinder in April 2026 to between ₹610–₹670/cylinder in May 2026. Furthermore, Saudi CP prices for Q1FY27 are projected to surge by 47% quarter-on-quarter, driven by supply constraints resulting from West Asian disruptions.

The Excise Duty Rollback Risk

A significant overhang for OMCs is the potential rollback of the ₹10/ltr excise duty cut. This reduction was originally implemented as a crisis management measure rather than a permanent fiscal policy. With crude oil prices moderating and the government implementing retail price hikes, there is growing speculation that the government may begin withdrawing these benefits.

The fiscal implications for the government are substantial, with the excise cut currently resulting in a revenue impact of approximately ₹1,700 billion per year. While a total sudden reversal is unlikely, the brokerage anticipates that any rollback of these duty cuts will likely happen in a phased manner, creating persistent pressure on the earnings of oil marketers.

Crude Oil Volatility and Inventory Dynamics

The sentiment surrounding crude oil has seen a slight uptick following the US-Iran ceasefire, which helped Brent crude drop below the USD 80/bbl mark. However, the brokerage warns that this is not a definitive trend. While the resumption of Iranian oil exports and normalcy at the Strait of Hormuz could soften prices further, demand-side factors remain strong.

The report notes that as global conflicts stabilize, countries that utilized their Strategic Petroleum Reserves (SPRs) during recent disruptions are expected to begin replenishing their stocks. This massive rebuilding of inventories is likely to create incremental demand, providing a floor for crude prices and ensuring that market volatility remains high, which in turn limits the compression of OMC margins.

Key Takeaways

  • Significant Losses Expected: OMCs face estimated under-recoveries of ₹7/ltr for MS and ₹10/ltr for HSD, alongside massive LPG losses of nearly ₹500/cylinder in Q1FY27.
  • Regulatory Headwinds: The potential phased rollback of the ₹10/ltr excise duty cut remains a major risk factor for the sector's long-term earnings.
  • Supply-Demand Volatility: While geopolitical easing may lower prices, global inventory replenishment (SPR rebuilding) is expected to support crude prices and maintain margin volatility.