India's oil marketing companies may be emerging from one of their toughest periods in recent years as crude prices retreat sharply from conflict-driven highs and fuel marketing margins recover. Brokerages JPMorgan and Kotak Institutional Equities have both turned more constructive on the outlook for state-run fuel retailers, arguing that the sharp correction in oil prices has eased pressure on profitability for Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd.
Kotak has upgraded BPCL, HPCL and IOCL to "Reduce" from "Sell" and raised target prices across the board.
JPMorgan said BPCL and IOCL remain its preferred picks, while Kotak expects the sector's fortunes to improve further if oil prices continue to ease.
JPMorgan said petrol and diesel margins have already recovered to levels above those seen before the latest Middle East conflict. The brokerage noted that while losses on LPG sales remain elevated, they are expected to decline as lower crude prices filter through the system.
The improvement comes after Brent crude prices fell more than 30% from recent peaks as fears of prolonged disruptions in the Middle East eased and expectations grew around a potential US-Iran agreement.
Kotak described the shift in fortunes more bluntly, saying "Happy days are back much sooner." It now expects OMCs to avoid losses in FY2027, helped by lower crude prices and a more supportive operating environment.
The recent rebound marks a sharp reversal from March-May, when OMCs faced severe pressure as crude prices surged to nearly $140 a barrel while retail fuel price hikes lagged. Kotak estimates that despite a Rs 10-litre increase in petrol and diesel prices, retail fuel margins remained inadequate at the time, while LPG under-recoveries compounded losses.
However, analysts caution that the near-term earnings picture may remain mixed.
JPMorgan expects first-quarter FY27 earnings to be hurt by inventory losses as companies revalue crude purchased at higher prices. But the brokerage believes profitability should improve from the second quarter onward as lower oil prices begin to support core refining and marketing margins.
JPMorgan noted that a significant part of the recent margin improvement stems from lower excise duties. While the government may allow OMCs time to repair balance sheets and reduce debt accumulated during the recent period of stress, the possibility of future excise duty hikes remains a key uncertainty.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.