JM Financial’s $80 Brent Forecast: A Game Changer for Oil India, ONGC, and OMCs?

Analysts at JM Financial project Brent crude oil prices to maintain an elevated level around $80 per barrel over the next 12 months, largely driven by supply recovery challenges and robust restocking demands globally. As countries aim to replenish inventories that were significantly depleted during recent crises, the risk of Middle Eastern oil output not returning to pre-crisis levels further supports this pricing outlook. The anticipated demand for strategic oil reserves, notably in India, adds to the upward pressure on prices. The brokerage anticipates that issues such as increased freight and insurance costs, along with geopolitical risks, could elevate crude prices by an additional $3-5 per barrel.

In light of these market conditions, JM Financial maintains a positive outlook on upstream producers, specifically Oil India and ONGC, maintaining ‘Buy’ ratings with target prices of Rs 560 and Rs 300, respectively. Oil India is characterized by its impressive earnings per share (EPS) growth potential, projected at 15-20% over the next three to five years, supported by the expansion of its refinery capacity and a robust crude output growth trajectory. The company expects its crude output to reach 4 million tonnes by FY27, with anticipated gas output rising significantly to 5 billion cubic meters by FY28-29 as infrastructure improvements progress.

Conversely, JM Financial retains a ‘Reduce’ rating on major oil marketing companies (OMCs) such as HPCL, BPCL, and IOCL. This assessment is driven by unfavorable risk-reward dynamics, particularly given the current integrated gross margin for OMCs, which stands at Rs 9 per liter— significantly below the historical average of Rs 12.5 per liter. The analysis indicates that OMCs could struggle to recover under-recoveries in fuel pricing, particularly in light of substantial book value erosion observed in HPCL, which saw a 19% decline in its consolidated book value in Q1FY27. Such challenges, combined with aggressive capex plans in refining and petrochemicals, contribute to the brokerage’s cautious stance on these entities.

Overall, while upstream firms like Oil India and ONGC are well-positioned to benefit from elevated crude prices and favorable growth prospects, the outlook remains bleak for OMCs facing margin compression and operational headwinds. The cautious stance stems from not only valuation considerations but also structural challenges in the refining sector that could hinder the OMCs from realizing potential profitability in the medium term.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)