OMC Earnings Under Pressure Due to Q1FY27 Under-Recoveries

Oil Marketing Companies (OMCs) in India are bracing for a challenging fiscal period, with profitability expected to face significant headwinds through FY27. While recent drops in Brent crude prices have offered some relief, structural under-recoveries and potential shifts in government taxation could keep margins thin.

The Impact of Q1FY27 Under-Recoveries

According to a recent research report by domestic brokerage firm Prabhudas Lilladher (PL), OMCs are likely to face a sharp impact on their bottom lines in the first quarter of FY27. The brokerage predicts significant under-recoveries that will directly weigh on earnings.

Specifically, for Q1FY27, under-recoveries are estimated at ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD). These figures are calculated assuming a ₹10/litre excise duty cut and a cap on cracks at USD 10/bbl for MS and USD 15/bbl for HSD. This combination of pricing gaps and regulated margins suggests that the recent respite in global crude prices may not be enough to bolster immediate profitability.

LPG: The Persistent Pain Point

Liquefied Petroleum Gas (LPG) continues to emerge as a major drag on the financial health of OMCs. The brokerage expects LPG under-recoveries to reach approximately ₹500/cylinder in Q1FY27.

The volatility in LPG margins is highlighted by recent trends; during the Q4FY26 period, OMCs reported LPG under-recoveries ranging from ₹610–₹670/cylinder in May 2026, a sharp increase from the ~₹170/cylinder recorded in April 2026. Adding to this pressure, Saudi CP prices for Q1FY27 are projected to rise by 47% quarter-on-quarter, driven by supply constraints resulting from disruptions in West Asia.

Excise Duty Rollback: A Major Regulatory Risk

A significant 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 price hikes are implemented, there is a growing possibility that the government may phase out these cuts.

Currently, the government bears a revenue impact of approximately ₹1,700 billion per year due to these excise cuts. Any move to recover this revenue through a phased rollback of duty benefits would act as a significant pressure point for OMC earnings.

Crude Oil Volatility and Inventory Rebuilding

While the US-Iran ceasefire has helped Brent crude drop below USD 80/bbl, the brokerage warns that near-term volatility remains high. While the resumption of Iranian oil exports could soften prices, a counter-force is at play: global inventory rebuilding.

As countries look to replenish their Strategic Petroleum Reserves (SPRs) and maintain optimum resource levels, incremental demand is expected to enter the market. This cycle of replenishment is likely to provide a floor for crude prices, preventing a sustained downward trend and keeping the operational environment for Indian OMCs complex.

Key Takeaways

  • Margin Compression: OMCs face significant under-recoveries in Q1FY27, specifically ₹7/litre in MS and ₹10/litre in HSD.
  • LPG Pressure: Rising Saudi CP prices and high under-recoveries (estimated at ₹500/cylinder) remain the biggest profitability bottlenecks.
  • Fiscal Risks: The potential phased rollback of the ₹10/litre excise duty cut poses a major risk to long-term earnings stability.