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.

De broker benadrukt dat de prijzen van ruwe olie waarschijnlijk steun zullen vinden door een toenemende vraag. Nu landen overgaan tot het aanvullen van hun strategische olievoorraden (Strategic Petroleum Reserves, SPR's) en algemene voorraden na het gebruik ervan tijdens recente conflicten, zal de resulterende vraag waarschijnlijk een aanhoudende neerwaartse trend in olieprijzen voorkomen. Deze cyclus van voorraadopbouw, gecombineerd met beperkingen in het aanbod, suggereert dat margedruk een hardnekkig thema voor de sector zal blijven.

Belangrijkste conclusies

  • LPG als grote rem: De tekorten in de LPG-vergoedingen zullen naar verwachting ~₹500/cilinder bereiken in Q1FY27, waarbij stijgende Saudi CP-prijzen het probleem verder verergeren.
  • Onzekerheid over accijnzen: Het mogelijke gefaseerde terugdraaien van de verlaging van de accijns met ₹10/ltr blijft een aanzienlijk risico voor het bedrijfsresultaat van OMCs.
  • Dynamiek van de ruwe olieprijzen: Hoewel geopolitieke ontspanning de prijzen tijdelijk kan verlagen, zal de wereldwijde aanvulling van voorraden waarschijnlijk de vraag aanjagen en de prijsvolatiliteit in stand houden.