OMC Earnings Under Pressure Due to Q1FY27 Under-Recoveries

Oil Marketing Companies (OMCs) face a challenging road ahead as profitability is expected to remain under significant pressure through FY27. According to a recent research report by Prabhudas Lilladher (PL), upcoming under-recoveries and the potential rollback of excise duty cuts are set to weigh heavily on the sector's margins.

The Impact of Under-Recoveries in Q1FY27

Despite a recent improvement in sentiment following Brent crude dropping below USD 80/bbl due to the US-Iran ceasefire, the outlook for Q1FY27 remains grim. The brokerage firm anticipates sharp hits to profitability driven by significant under-recoveries.

Specifically, the report expects under-recoveries of ₹7/ltr for Motor Spirit (MS) and ₹10/ltr for High-Speed Diesel (HSD) in Q1FY27. These estimates take into account a ₹10/ltr excise cut and capped cracks of USD 10/bbl for MS and USD 15/bbl for HSD.

LPG is identified as the most critical pain point for OMCs. Losses for LPG are estimated to reach approximately ₹500/cylinder in Q1FY27. This follows a period of high volatility where, according to Q4FY26 commentary, LPG under-recoveries swung from ~₹170/cylinder in April 2026 to a staggering range of ₹610-₹670/cylinder in May 2026. Adding to this strain, Saudi CP prices for Q1FY27 are projected to rise by 47% quarter-on-quarter due to supply constraints stemming from West Asia disruptions.

The Excise Duty Rollback Risk

A major overhang for the sector is the potential government decision to roll back the ₹10/ltr excise duty cut. This cut was originally introduced as a crisis management measure rather than a permanent fiscal policy.

As crude prices moderate and retail price hikes are implemented, the government may seek to reclaim revenue. Currently, the government bears a revenue impact of approximately ₹1,700 billion annually due to this excise cut. While Prabhudas Lilladher expects any rollback to happen in a phased manner, the mere possibility remains a key pressure point for OMC earnings.

Crude Oil Volatility and Inventory Rebuilding

The trajectory of crude oil prices remains a complex variable for the OMCs. While the geopolitical easing between the US and Iran could lead to a near-term decline in prices—especially if normalcy is restored at the Strait of Hormuz—long-term volatility is expected.

La correduría destaca que es probable que los precios del crudo encuentren soporte mediante un incremento en la demanda. A medida que los países se dispongan a reponer sus Reservas Estratégicas de Petróleo (SPR) y sus inventarios generales tras haberlos utilizado durante conflictos recientes, la demanda resultante probablemente evitará una tendencia bajista sostenida en los precios del petróleo. Este ciclo de reconstrucción de inventarios, sumado a las restricciones de suministro, sugiere que la compresión de márgenes seguirá siendo un tema recurrente para la industria.

Conclusiones clave

  • El GLP como un lastre importante: Se espera que las subrecuperaciones de GLP alcancen aproximadamente ₹500/cilindro en el Q1FY27, y el aumento de los precios del CP saudí agravará aún más el problema.
  • Incertidumbre sobre el impuesto especial: La posible reversión gradual del recorte del impuesto especial de ₹10/litro sigue siendo un riesgo significativo para los resultados netos de las OMC.
  • Dinámica de los precios del crudo: Aunque la relajación de las tensiones geopolíticas podría reducir los precios temporalmente, la reposición de los inventarios globales probablemente impulsará la demanda y mantendrá la volatilidad de los precios.