IOC, BPCL, HPCL Poised For Gains On Rs 30,000-Crore LPG Subsidy: Will US Tariffs Play Spoilsport?—Explained

India's state-run oil marketing companies (OMCs) are poised for gains this year after the Union Cabinet approved a Rs 30,000-crore fund earlier this month to reimburse Indian Oil Corp, Bharat Petroleum Corp Ltd, and Hindustan Petroleum Corp Ltd for losses in their liquified petroleum gas sales. However, the OMCs will still likely incur losses in the near-term after US President Donald Trump hiked the tariff rate on India from 25 to 50%.

Trump had earlier set the tariff at 25% and threatened a penalty for India's constant purchases of crude oil from Russia. However, the final round of negotiations between India and US will decide the tariff rate. Economists expect US to decrease the rate by 20-25% in the final trade deal. It remains to be seen the extent to which OMCs will have to bear the brunt on margins and profits if the government reduces Russian oil imports over US tariffs.

In the run-up to the India-US trade deal, OMC stocks have been mixed with the Nifty Oil & Gas index down 3.36% in the last three months. IOC and HPCL also logged losses of 2.8% and 4.8% in the period, whereas BPCL gained nearly 1% in three months. In the last one month alone, IOC has shed 4.7%, BPCL has dropped over 5%, and HPCL slumped 7.4%.

On a year-to-date basis, HPCL share price is down 4.5%, IOC shares have gained 2.6%, whereas BPCL stock price has jumped 8% during the period. IOC is still the country's largest state-run OMC and commands a market cap of Rs 1,99,575.46 crore with the largest network, followed by BPCL and HPCL.

Earlier this month, the Union Cabinet approved a Rs 30,000-crore fund to reimburse the OMCs for losses in their liquified petroleum gas sales. This compensation will allow the OMCs to meet their critical requirements such as crude and LPG procurement, servicing of debt, and sustain capex.

The compensation will be paid in 12 tranches. The domestic LPG cylinders are supplied at regulated prices to consumers by the OMCs. The international prices of LPG remained high during 2024-25 and continue to remain high.

However, to insulate consumers from fluctuations in international LPG prices, the increase in cost was not passed on to consumers which led to significant losses for the OMCs. Despite the losses, the OMCs ensured continuous supplies of domestic LPG in the country at affordable prices.

The losses were also due to the Rs 100/cylinder price cut announced before General Elections 2024. With the Rs 30,000-crore reimbursement, nearly 73% of the losses incurred in FY25 by the OMCs will be covered.

The LPG subsidy will positively impact on the P&L sheets of the OMCs in FY26. It will free-up working capital and the funds could be used to repay debt for capex. It also removes overhang related to LPG subsidy and reinstates confidence that the government's support is intact.

Notably, domestic brokerage Motilal Oswal Financial Services highlighted that the oil and gas sector contributed significantly to the Nifty 500 pack earnings growth during the April-June quarter of FY26. Nifty 500 reported EBITDA/bottomline growth of 18%/32% YoY in Q1FY26, mainly led by OMCs (+151% YoY net profit growth).

Russian crude accounts for 35%-40% of crude imports for Indian OMCs. A full halt of these imports could hurt their Ebitda by about 10%. Research estimates suggest OMCs were getting $1.5-2/barrel discounts on crude imports from Russia. Assuming no change in crude prices, just the shift in sourcing would increase the cost by $2/barrel.

The rise in the crude sourcing cost will impact marketing margins if not passed on. Generally, every $1/barrel rise in crude lowers marketing margins by Rs 0.5/litre. Hence, the Ebitda of OMCs will be impacted by 10%. But, the credit ratings for IOC, BPCL, and HPCL are expected to remain unaffected due to government support, according to Fitch.

According to Emkay Global Financial Services, OMC stocks have seen the weakness from the volatile Russian scenario, with the US imposing additional tariffs on India due to import of discounted Russian crude. The government has maintained national interest with no explicit order to domestic refiners.

However, as per management commentaries in Q1, crude decisions are commercially driven. The brokerage also verified that the discount on crude oil was ~$1.5/barrel only. BPCL has the highest share of Russian crude at ~35%, followed by IOC at ~25%, and HPCL at just ~13%.

Hence, compared with Q1’s core gross refining margins of $6.6-6.9/barrel, the downside risk from Russian crude is only up to $6.4-6.5/barrel. There was also an impact of intermediate stocks from a diesel unit’s turnaround for HPCL in Q1.

According to Emkay, the Q2 GRMs should be better for OMCs, with middle distillate cracks strengthening and oil prices largely stable. This comes despite the Ebitda hit of nearly 10% in the near-term over tariff pressure.