OMC Profitability Set To Improve As Petrol, Diesel Margins Rebound: Report

State-run fuel retailers are seeing a recovery in profitability after crude oil prices retreated from recent highs.

According to JP Morgan, composite margins on petrol and diesel sales at OMCs have moved above pre-conflict levels, helped by lower crude prices and reduced excise duties.

According to the report, the margin improvement could support earnings from the second quarter onwards, although April-June quarter results may remain under pressure due to inventory losses linked to the recent decline in oil prices.

Why Have Petrol And Diesel Margins Improved?

The start of the West Asia conflict pushed global oil prices sharply higher. Retail fuel prices in India, however, remained largely unchanged for a prolonged period and rose only by a fraction of the increase required to fully offset higher costs.

Even after petrol and diesel prices were raised by ₹7.50 per litre in May, pump prices remained below cost levels for some time.

According to the brokerage, composite petrol and diesel margins have now moved above levels seen before the conflict.

The improvement reflects stronger combined refining and fuel marketing economics. While standalone fuel marketing margins remain below historical averages, overall profitability has strengthened as crude prices retreated.

JP Morgan also said losses on LPG sales continue to remain high, though these are expected to ease if lower oil prices persist.

Which Oil Marketing Companies Stand To Benefit The Most?

Among the three state-run OMCs, BPCL and IOC are expected to gain the most from the current margin environment. The brokerage estimated that composite petrol and diesel margins at BPCL and IOC are now above pre-conflict levels.

If crude prices remain below $80 per barrel and refining margins stay elevated, earnings could improve from the second quarter of FY27 onwards.

Analysts also expect lower oil prices to gradually reduce LPG under-recoveries, providing additional support to profitability.

BPCL shares closed at ₹308.00 on 22 June, up 0.46%. IOC shares ended at ₹144.21, gaining 0.54% during the session.

What Risks Could Limit The Sector's Earnings Recovery?

OMCs are likely to report inventory losses in the April-June quarter after crude oil prices fell sharply from recent highs.

It also expects borrowings to remain elevated after companies absorbed losses on the sale of petrol, diesel and LPG over recent months.

Another area being watched closely is fuel taxation. The government reduced excise duty on petrol and diesel by ₹10 per litre each in March to cushion consumers from higher global oil prices.

JP Morgan estimates that the lower duties have reduced government revenue by roughly ₹1.8 lakh crore annually.

Analysts said the government may allow OMCs to retain higher margins for a period to help reduce debt accumulated during recent under-recovery phases. However, the possibility of excise duties being restored once crude prices stabilise remains a key risk for the sector.

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As a result, the brokerage expects earnings conditions to remain favourable in the December and March quarters if crude prices stay subdued while noting that visibility on fuel marketing margins beyond FY28 remains limited.

For now, the sector's earnings outlook continues to depend largely on crude oil movements and government tax policy, with BPCL and IOC remaining JP Morgan's preferred picks in the current environment.

Source:

The Hindu