Nomura bullish on OMCs, sees BPCL as top pick with 26% upside

Oil Marketing Company (OMC) stocks are likely to witness a robust trajectory ahead. Global brokerage firm Nomura has issued a ‘Buy’ rating on all three major public sector refiners: Hindustan Petroleum Corporation Ltd (HPCL), Indian Oil Corporation Ltd (IOCL) and Bharat Petroleum Corporation Ltd (BPCL). As per the brokerage firm, India's state-run downstream firms have seen high marketing margins on petrol and diesel, reaching around ₹10.3 per litre during the first quarter of FY26. These levels are more than triple the five-year average of ₹3 per litre. 

 

Meanwhile, at the macro front, a combination of developments, like a drop in global crude oil prices and reports indicating that the government might soon announce a compensation package for state-run oil marketing companies (OMCs), might add to the overall uptrend. 

 

According to a report by moneycontrol, the Finance Ministry is close to finalising a compensation package for OMCs, including BPCL, IOC and HPCL, to cover losses incurred from selling cooking gas (LPG) below cost. The Expenditure Finance Committee (EFC) has already held discussions earlier this year about settling the dues. These companies reportedly suffered ₹30,000 crore in losses due to the rising cost of LPG, between April and December 2024

 

Once approved, the relief package will allow these companies to either offset those losses or invest in infrastructure projects.

OMC stock performance

So far this calendar year, the BSE oil and gas index has delivered gains of nearly 8 per cent. In contrast, Sensex has experienced a surge of 6.8 per cent during the same period. Shares of HPCL and BPCL have witnessed a double-digit surge from their June lows, when the Israel-Iran rift resulted in a sharp drop in oil prices. For instance, as of now, the shares of HPCL have witnessed a 14 per cent surge from June lows. 

While concerns continue to linger around a prospective adjustment in margin levels via excise duty hikes by the government, Nomura believes that OMC will continue to sit on healthy margins.

 

"We expect marketing margins to average at ₹6 per liter for FY26-28F for all OMCs, which is still a highly healthy margin (compared to historical range of ₹3-5 per liter), and it also gives room for the government to allow OMCs to absorb some volatility in oil prices in the future," Nomura stated in its report.

BPCL top pick among OMCs

Over the last five years, BPCL has maintained a strong average refinery utilisation rate of around 106 per cent, outpacing that of HPCL and IOCL, which operated in the 96–99 per cent range. That apart, the company also has a higher distillate yield, averaging about 84 per cent. Its peers, on the other hand, have delivered between 73 per cent and 77 per cent yield.

 

"We prefer BPCL due to its balanced exposure to both refining and marketing, superior refinery operating metrics compared to its peers, and a reasonably high marketing footprint," the brokerage firm stated in its recent report.

 

BPCL has also posted the highest gross refining margins (GRMs) among the three major oil marketing companies, as per Nomura. The brokerage firm has maintained a 'Buy' rating on the stock with a target price of ₹435 on the current market price of ₹346, implying an upside of 26 per cent. For HPCL, the brokerage firm is seeing an upside of 21 per cent from the current market price of ₹445. As for IOCL, Nomura is not expecting any meaningful earnings contribution in the near-to-medium term from the company's petchem expansions, but has maintained a 'Buy' with potential upside of 6 per cent.