OMC Earnings Outlook: Under-Recoveries and Excise Risks to Weigh on Profits

Oil Marketing Companies (OMCs) in India are bracing for a challenging fiscal period, with profitability expected to face significant headwinds through FY27. While recent dips in Brent crude prices provided temporary relief, structural issues like under-recoveries and potential government policy shifts are set to compress margins.

The Impact of Q1FY27 Under-Recoveries

According to a recent research report by domestic brokerage Prabhudas Lilladher (PL), the first quarter of FY27 is expected to weigh heavily on the profitability of OMCs. The brokerage anticipates significant under-recoveries due to specific pricing constraints.

Specifically, the report expects under-recoveries of ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD). These figures are calculated after factoring in a ₹10/litre excise duty cut and capping product cracks at USD 10/bbl for MS and USD 15/bbl for HSD. This suggests that even with moderating crude prices, the gap between procurement costs and retail selling prices remains a major concern for the sector.

LPG: The Persistent Pain Point

Liquefied Petroleum Gas (LPG) continues to be a significant drain on OMC balance sheets. The brokerage estimates that LPG under-recoveries could reach approximately ₹500/cylinder in Q1FY27.

This follows a volatile trend observed in previous quarters; for instance, LPG under-recoveries in May 2026 were estimated in the range of ₹610-₹670/cylinder, compared to much lower levels of ~₹170/cylinder in April 2026. Adding to this pressure, Saudi CP prices for Q1FY27 are projected to surge by 47% quarter-on-quarter, driven by supply constraints stemming from disruptions in West Asia.

The Excise Duty Rollback Risk

A critical variable for OMC earnings is the potential rollback of excise duty cuts. The current ₹10/litre excise cut was implemented as a crisis management measure rather than a permanent fiscal policy. As crude oil prices moderate and retail prices are adjusted, there is a growing possibility that the government may phasedly withdraw this benefit.

Currently, the government bears a revenue impact of approximately ₹1,700 billion annually due to these excise cuts. Any move to recover this revenue through a rollback of the duty cut would act as a significant pressure point for the OMCs' bottom lines.

Crude Oil Volatility and Inventory Rebuilding

While the US-Iran ceasefire has helped Brent crude drop below the USD 80/bbl mark, the outlook for oil prices remains volatile. While a return to normalcy at the Strait of Hormuz could soften prices further, a counter-force is expected: inventory replenishment.

As nations begin to replenish their Strategic Petroleum Reserves (SPRs) and standard inventories after utilizing them during recent conflicts, incremental demand is expected to support prices. This cycle of replenishment is likely to prevent a sustained downward trend in crude costs, keeping the margin squeeze on OMCs active.

Key Takeaways

  • Profitability Pressure: Significant under-recoveries in MS (₹7/ltr) and HSD (₹10/ltr) are expected to impact Q1FY27 earnings.
  • LPG Vulnerability: LPG remains a major loss leader, with estimated under-recoveries of ₹500/cylinder amid rising Saudi CP prices.
  • Policy Risks: The potential phased rollback of the ₹10/ltr excise duty cut remains a primary risk factor for OMC margins.