Earnings of OMCs Expected to Decline as Q1FY27 Under-Recoveries Take a Toll: Report
In the latest analysis on oil marketing companies (OMCs), a domestic brokerage firm has forecast significant pressure on profitability extending through FY27, particularly in the first quarter. The report emphasizes that OMCs are facing an under-recovery of Rs7.0 per liter for petrol and Rs10.0 per liter for diesel in Q1 FY27, which suggests an ongoing challenge to maintain margins despite a recent decline in Brent crude oil prices below USD80 per barrel. The anticipated under-recoveries arise despite a temporary excise cut of Rs10 per liter, indicating a precarious balance in pricing dynamics and cost recovery mechanisms within the sector.
The analysis identifies liquefied petroleum gas (LPG) as a critical pain point for OMCs, with projected losses reportedly reaching as high as Rs500 per cylinder in Q1 FY27—a significant increase from earlier estimations. This sharp rise in under-recoveries is linked to escalating Saudi CP prices, expected to surge by 47% on a quarter-on-quarter basis due to ongoing supply constraints stemming from geopolitical tensions in West Asia. The report underscores that the imbalance in LPG pricing is likely to erode financial stability for OMCs, further complicating their operational outlook.
Additionally, the brokerage reports that while there is a recent optimistic sentiment regarding crude oil prices due to developments in the US-Iran situation, the volatility in prices is expected to persist. The anticipated resumption of Iranian oil exports may provide short-term relief; however, the need for many countries to replenish their strategic petroleum reserves could create upward pressure on prices. This duality of supply and demand factors is poised to limit any substantial decline in oil prices, necessitating careful scrutiny of inventory levels and market dynamics moving forward.
Crucially, the potential rollback of excise duty represents a significant risk factor for OMCs, with the government facing an ongoing revenue impact of approximately INR 1700 billion per year due to current cuts. The brokerage warns that the phased withdrawal of this excise cut, perceived as a temporary measure rather than a permanent policy adjustment, could exacerbate profitability challenges. Investors should remain vigilant as the balance of supply, demand, and regulatory frameworks play a pivotal role in shaping the outlook for oil marketing companies in the near term.
Source: The Economic Times
(Expert Note: This report was prepared by the Wealthova team.)