OMC Earnings Face Headwinds Amid Q1FY27 Under-Recoveries

Oil Marketing Companies (OMCs) are bracing for a challenging period as significant under-recoveries and regulatory risks threaten to squeeze profitability through FY27. Despite recent improvements in global crude sentiment, domestic brokerage Prabhudas Lilladher warns that several structural and macroeconomic factors could weigh heavily on earnings.

The Impact of Under-Recoveries in Q1FY27

While the recent drop in Brent crude below USD 80/bbl has provided some near-term relief, the outlook for Q1FY27 remains cautious. Prabhudas Lilladher anticipates significant under-recoveries that will impact the bottom line. Specifically, the firm expects under-recoveries of ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD), based on a ₹10/litre excise cut and capped cracks of USD 10/bbl and USD 15/bbl respectively.

Liquefied Petroleum Gas (LPG) is identified as the most significant pain point for OMCs. Losses for LPG are estimated to reach approximately ₹500/cylinder in Q1FY27. This follows a volatile trend observed in mid-2026, where LPG under-recoveries swung from roughly ₹170/cylinder in April to between ₹610–₹670/cylinder in May. This pressure is compounded by an expected 47% quarter-on-quarter increase in Saudi CP prices for Q1FY27, driven by supply constraints following West Asia disruptions.

The Excise Duty Rollback Risk

A major overhang for the sector is the potential rollback of excise duty cuts. The current ₹10/litre excise cut was implemented as a crisis management measure rather than a permanent policy. As crude prices moderate and retail price hikes are implemented, there is a growing possibility that the government may gradually withdraw these benefits.

The scale of this fiscal measure is substantial, with the government currently bearing a revenue impact of approximately ₹1,700 billion per year due to these cuts. While any rollback is expected to happen in a phased manner, the mere possibility of such a move remains a key pressure point for OMC earnings and investor sentiment.

Crude Oil Volatility and Inventory Dynamics

The global crude oil market remains a double-edged sword for Indian OMCs. On one hand, a positive progression in the US-Iran situation and normalcy at the Strait of Hormuz could soften prices. On the other hand, structural demand for oil is expected to keep prices volatile.

As global conflicts subside, countries that utilized Strategic Petroleum Reserves (SPRs) are expected to begin replenishing their stocks to maintain optimum resource levels. This massive wave of inventory rebuilding is expected to create incremental demand, providing a floor for crude prices and preventing a sustained downward trend. Consequently, OMCs must navigate a landscape defined by both supply-side shifts and sudden demand spikes from global inventory management.

Key Takeaways

  • LPG Losses: LPG remains the biggest drag on profitability, with estimated losses of ₹500 per cylinder in Q1FY27.
  • Fiscal Risk: The potential phased rollback of the ₹10/litre excise duty cut poses a significant threat to OMCs' margins.
  • Crude Volatility: While geopolitical easing may lower prices, global inventory replenishment is expected to support crude demand and maintain price volatility.