OMC Earnings Under Pressure Amid Q1FY27 Under-Recoveries and Excise Risks

Indian Oil Marketing Companies (OMCs) are bracing for a challenging fiscal period as projected under-recoveries for Q1FY27 threaten to squeeze profitability. Despite recent improvements in global crude sentiment, domestic brokerage Prabhudas Lilladher warns that margin compression and regulatory uncertainties will likely keep earnings under pressure through FY27.

The Impact of Under-Recoveries in Q1FY27

A significant factor weighing down the outlook for OMCs is the anticipated under-recovery in fuel segments. According to a recent research report by Prabhudas Lilladher, the industry is expected to face under-recoveries of ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD) in the first quarter of FY27. These projections account for a ₹10/litre excise duty cut and capped crack spreads of USD 10/bbl for MS and USD 15/bbl for HSD.

LPG remains a critical pain point for the sector. Losses in the LPG segment are estimated to reach approximately ₹500/cylinder in Q1FY27. This follows a volatile trend observed in the previous quarter, where LPG under-recoveries surged from roughly ₹170/cylinder in April 2026 to between ₹610–₹670/cylinder in May 2026. Adding to this pressure, Saudi CP prices for Q1FY27 are expected to climb by 47% quarter-on-quarter, driven by supply constraints stemming from disruptions in West Asia.

The Excise Duty Rollback Overhang

Beyond operational costs, a major regulatory risk looms over OMCs: the potential rollback of excise duty cuts. The current ₹10/litre excise cut was originally implemented as a crisis management measure rather than a permanent fiscal policy. As crude prices moderate and retail price hikes are implemented, the government may move to gradually withdraw this benefit to recover lost revenue.

The financial stakes for the government are high, with the current excise cuts resulting in a revenue impact of approximately ₹1,700 billion annually. While any rollback is expected to happen in a phased manner, the mere possibility of this move continues to act as a significant overhang on the earnings sentiment for oil marketers.

Crude Oil Volatility and Inventory Dynamics

While the recent US-Iran ceasefire has helped Brent crude drop below the USD 80/bbl mark, the brokerage warns that the downward trend may be short-lived. While the resumption of Iranian oil exports and stability at the Strait of Hormuz could soften prices in the near term, a supply-demand shift is expected to follow.

The report highlights that global demand for crude is likely to rise as countries begin to replenish their Strategic Petroleum Reserves (SPRs) and general inventories. This replenishment cycle, necessitated by the recent conflict-driven depletion of stocks, is expected to provide a floor for oil prices and maintain market volatility, preventing a sustained period of low-cost crude for Indian importers.

Key Takeaways

  • Margin Compression: OMCs face significant under-recoveries in Q1FY27, specifically ₹7/litre for MS and ₹10/litre for HSD, alongside heavy losses in the LPG segment.
  • Regulatory Risk: The potential phased rollback of the ₹10/litre excise duty cut remains a major threat to the long-term profitability of oil marketers.
  • Crude Volatility: While prices have eased recently, global inventory replenishment and West Asian supply constraints are expected to keep crude oil prices volatile.