OMC Earnings Under Pressure Due to Q1FY27 Under-Recoveries

Oil Marketing Companies (OMCs) in India are facing a challenging outlook through the 2027 fiscal year, with profitability expected to be squeezed by significant under-recoveries. Despite a recent uptick in sentiment due to cooling crude prices, domestic brokerage Prabhudas Lilladher warns that structural and regulatory headwinds will continue to weigh on margins.

The Impact of Under-Recoveries and LPG Losses

The primary concern for OMCs lies in the projected under-recoveries for Q1FY27. According to the Prabhudas Lilladher report, the industry is expected to face under-recoveries of ₹7/litre for Motor Spirit (MS) and ₹10/litre for High-Speed Diesel (HSD). These figures take into account a ₹10/litre 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 the most significant pain point for the sector. Losses for LPG are estimated to reach approximately ₹500 per cylinder in Q1FY27. This follows a period of intense volatility; data shows that while LPG under-recoveries were around ₹170/cylinder in April 2026, they surged to a range of ₹610–₹670/cylinder by May 2026. Adding to this pressure, Saudi CP prices are expected to jump by 47% quarter-on-quarter for Q1FY27 due to supply constraints stemming from West Asian disruptions.

Regulatory Risks: The Excise Duty Rollback

A major overhang for the earnings of OMCs is the potential rollback of excise duty cuts. The ₹10/litre excise cut was initially 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 gradually withdraw these benefits.

The fiscal implications for the government are substantial, with the excise cut currently resulting in a revenue impact of approximately ₹1,700 billion per year. While the brokerage expects any rollback to occur in a phased manner, the mere possibility of this move continues to act as a pressure point for OMC stock valuations and bottom-line stability.

Crude Oil Volatility and Inventory Rebuilding

The sentiment regarding crude oil prices remains a tug-of-war between geopolitical relief and demand-side replenishment. While the US-Iran ceasefire and the potential for normalcy in the Strait of Hormuz have helped Brent crude drop below USD 80/bbl, experts warn that prices are unlikely to stay low for long.

The report highlights that as countries begin to replenish their Strategic Petroleum Reserves (SPRs) and general inventories to maintain optimum resource levels, incremental demand will likely drive prices back up. While Iranian oil exports are expected to resume, the global shift toward rebuilding stocks will act as a price floor, preventing a significant downward trend in crude costs and keeping the margin compression risks alive for Indian refiners.

Key Takeaways

  • Profitability Squeeze: OMCs face estimated under-recoveries of ₹7/litre for MS and ₹10/litre for HSD in Q1FY27, with LPG losses projected at ₹500/cylinder.
  • Fiscal Uncertainty: The potential phased rollback of the ₹10/litre excise duty cut remains a critical risk factor for OMCs' long-term earnings.
  • Crude Dynamics: While geopolitical tensions have temporarily eased, global inventory rebuilding and a 47% rise in Saudi CP prices are expected to maintain market volatility.