 "As Brent crude price trades below $70 per barrel, analysts are backing aviation and tyre stocks and are cautious about paints and oil marketing companies (OMCs). “Oil prices are down over 20 per cent from their recent peak and bode well for sectors")
At the India Energy Week, an interaction between analysts and the Minister of Petroleum and Natural Gas (MoPNG), Hardeep Singh Puri, and Secretary, MoPNG, Pankaj Jain outlined the challenges for Oil Marketing Companies or OMCs.
Pricing freedom is not likely and while the Ministry will push for LPG compensation, entire under-recovery is unlikely to be compensated. There is also a focus on increasing OMCs petrochemical integration which means large capex at a time of weak earnings. Moreover, several projects have been delayed, implying longer time to production.
Despite no financial year 2026 (FY26) budget provisions, OMCs may be partially compensated for LPG under-recovery. In the first nine months of FY25 (9MFY25), combined under-recovery amounted to ₹29,160 crore with ₹14,330 crore to IOCL, ₹7,230 crore to BPCL and ₹7,600 crore for HPCL.
Given similar trends in Q4FY25 cumulative under-recoveries could exceed ₹40,000 crore for FY25.
India’s refining capacity is expected to increase from 257 million metric tonnes per annum or mmtpa to 310 mmtpa by 2028. Petrochemical capacity is projected to rise from 29.6 mmtpa to 46 mmtpa.
Higher petchem capacity will reduce dependence on imports, and allow refiners to upgrade to higher-value products and achieve a diversified earnings profile. But until projects are complete, it will mean more debt and less free cash flows.
HPCL could offer comparatively better prospects. The positive triggers include the demerger and potential listing of the lubricant business, the commissioning of its bottom-upgrade unit in Q4FY25, production start at its Rajasthan refinery in calendar year 2025 (CY25), and LPG under-recovery compensation.
The core performance of OMCs in Q3FY25 was in line. There was a Y-o-Y and Q-o-Q increase in operating profit and net profit driven by better core gross refining margins or GRMs. BPCL and HPCL outperformed IOCL. The GRMs for the three OMCs ranged between $3-$6 per barrel or bbl on a reported basis including inventory losses, while marketing margin was also variable.
In terms of blended marketing margins, BPCL was better than HPCL and IOCL. BPCL at $6.2 per bbl continues to outperform HPCL ($5.9/bbl) and IOCL ($5.2/bbl). The debt situation is also best for BPCL.
Softening of crude oil prices limits inventory gains and keeps refining margins under pressure. The rupee weakness raises import costs for crude oil, LNG, equipment among others. The Russian crude discount is dropping (it is zero in CY2025 versus $3-3.5/bbl in 2024 and $7-8/bbl in 2023) and this reduces profitability. A rising share of non-OPEC supply may improve sourcing flexibility.
Despite earnings pressure and inventory losses, the three OMCs have big capex plans. IOCL is aiming at ₹35,800 crore annual capex for FY25 and ₹33,000 crore for FY26, BPCL has capex plans of ₹1.7 trillion, with ₹1.3 trillion already approved.
Capex for FY26 & FY27 stands at ₹19,000-24,000 crore annually, with capex at ₹25,000 crore annually from FY28 onwards. HPCL has committed ₹13,000-15,000 crore in annual capex for FY25 & FY26. Its ₹71,800 crore Rajasthan refinery is 83 per cent complete but is facing cost overruns and delays.
Many other large-scale projects are running behind schedule. IOCL’s Panipat Refinery expansion is rescheduled for completion in December, 2025. The project cost has escalated from ₹33,000 crore to ₹36,225 crore. IOCL’s Gujarat refinery expansion has cost overruns of ₹24,000 crore and IOCL’s Barauni refinery expansion also has cost overruns.
IOCL and CPCL’s Cauvery Basin refinery at Nagapattinam was initially scheduled for end-2025 completion but has now been pushed to 2027. The project cost has increased to ₹36,400 crore, with 66 per cent debt financing.
BPCL, HPCL and IOCL have all seen corrections but while valuations are below long-term averages, there could be further downsides due to multiple challenges. Currently the three OMCs (and other midstream PSUs such as MRPL) are trading at expected price/book value (P/BV) of between 1.1 and 1.5 times for FY25. Given the cyclical history, and the squeeze on free cash flow triggered by capex plans, valuations could slide till the 0.6-0.7 P/BV levels.
