OMC Earnings Under Pressure: Q1FY27 Under-Recoveries to Bite

Oil Marketing Companies (OMCs) in India are bracing for a challenging period as significant under-recoveries are expected to weigh heavily on profitability through FY27. While recent drops in Brent crude prices have provided minor relief, structural risks and shifting government policies continue to cloud the outlook for the sector.

The Impact of Q1FY27 Under-Recoveries

According to a research report by brokerage firm Prabhudas Lilladher (PL), the profitability of OMCs is expected to face a sharp downturn in the first quarter of FY27. The report highlights substantial under-recoveries, estimating figures at ₹7.0/ltr for Motor Spirit (MS) and ₹10/ltr for High-Speed Diesel (HSD). These projections take into account a ₹10/ltr excise duty cut and a capping of cracks at USD 10/bbl for MS and USD 15/bbl for HSD.

Liquefied Petroleum Gas (LPG) remains a major financial pain point for these companies. Losses in the LPG segment are estimated to reach approximately ₹500 per cylinder in Q1FY27. This follows a volatile period in mid-2026, where LPG under-recoveries surged from roughly ₹170/cyl in April to between ₹610–₹670/cyl in May. Furthermore, Saudi CP prices for Q1FY27 are anticipated to rise by 47% quarter-on-quarter, driven by supply constraints linked to disruptions in West Asia.

The Excise Duty Rollback Risk

A significant overhang on OMC earnings is the potential rollback of excise duty cuts. The ₹10/ltr excise cut was originally implemented as a crisis management tool rather than a permanent fiscal measure. With crude oil prices moderating and retail price adjustments being implemented, there is growing speculation that the government may begin a phased withdrawal of these benefits.

The fiscal implications are massive; the government currently bears a revenue impact of approximately ₹1,700 billion per year due to these excise cuts. Any move to reclaim this revenue could create additional pressure on the margins of domestic oil marketers.

Crude Oil Volatility and Inventory Dynamics

The global crude oil market presents a mixed bag for OMCs. While the US-Iran ceasefire has helped Brent crude drop below the USD 80/bbl mark, the brokerage warns that long-term volatility is inevitable.

While the resumption of Iranian oil exports may soften prices in the near term, a new demand driver is emerging: inventory replenishment. Countries that utilized their Strategic Petroleum Reserves (SPRs) during recent geopolitical conflicts are expected to begin rebuilding their stocks. This massive replenishment effort, combined with the need to maintain optimum resource levels, is expected to create incremental demand and provide a floor for crude oil prices.

Key Takeaways

  • Heavy Under-recoveries: OMCs face significant margin compression in Q1FY27, with MS and HSD under-recoveries estimated at ₹7–₹10/ltr and LPG losses near ₹500/cyl.
  • Policy Risk: The potential phased rollback of the ₹10/ltr excise duty cut remains a major threat to long-term earnings stability.
  • Supply-Demand Tension: While geopolitical de-escalation may lower prices temporarily, global inventory rebuilding and rising Saudi CP prices will likely sustain market volatility.