OMC Earnings Outlook: Why Under-Recoveries and Excise Risks Loom for FY27

Oil Marketing Companies (OMCs) are bracing for a challenging fiscal period as projected under-recoveries for Q1FY27 threaten to squeeze profitability. Despite recent stabilization in global crude prices, a combination of high LPG costs and potential shifts in government tax policy creates a complex landscape for these energy giants.

The Q1FY27 Profitability Crunch: Under-Recoveries Explained

According to a recent research report by domestic brokerage Prabhudas Lilladher (PL), the upcoming first quarter of FY27 is expected to weigh heavily on the earnings of OMCs. The brokerage anticipates significant under-recoveries in fuel segments, estimated at ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD). These calculations factor in a ₹10/litre excise duty cut and a capping of cracks at USD 10/bbl for MS and USD 15/bbl for HSD.

The most significant pain point, however, remains Liquefied Petroleum Gas (LPG). Losses in the LPG segment are estimated to reach approximately ₹500 per cylinder in Q1FY27. This follows a volatile period in mid-2026, where OMCs reported LPG under-recoveries jumping from roughly ₹170/cylinder in April 2026 to between ₹610 and ₹670/cylinder in May 2026. This pressure is exacerbated by the expectation that Saudi CP prices for Q1FY27 will rise by 47% quarter-on-quarter, driven by supply constraints in West Asia.

The Excise Duty Rollback: A Persistent Regulatory Risk

A major overhang for the sector is the potential rollback of excise duty cuts. The ₹10/litre excise cut was originally introduced as a crisis management measure rather than a permanent fiscal policy. As crude oil prices moderate and retail prices see adjustments, there is a growing possibility that the government may begin withdrawing these benefits in a phased manner.

Currently, the government bears a substantial revenue impact of approximately ₹1,700 billion per year due to these excise cuts. For OMCs, any move by the government to reclaim this revenue through duty hikes or the removal of subsidies remains a key risk factor that could further destabilize earnings projections.

Crude Oil Volatility and Inventory Rebuilding

While the recent US-Iran ceasefire has helped Brent crude drop below the USD 80/bbl mark, the brokerage warns against complacency. While the resumption of Iranian oil exports and normalcy at the Strait of Hormuz could soften prices in the near term, a secondary wave of demand is expected.

Global demand is likely to be bolstered as nations move to replenish their Strategic Petroleum Reserves (SPRs) and general inventories. This replenishment cycle is expected to create incremental demand, preventing a prolonged downward trend in crude prices and ensuring that market volatility remains high, which in turn keeps margins compressed for domestic refiners.

Key Takeaways

  • LPG Losses: Significant under-recoveries in LPG, estimated at ₹500/cylinder, and rising Saudi CP prices are major threats to margins.
  • Fiscal Risk: The potential phased rollback of the ₹10/litre excise duty cut remains a critical pressure point for OMC profitability.
  • Crude Dynamics: While prices have seen a reprieve, global inventory rebuilding is expected to drive volatility and support crude prices in the medium term.