Motilal Oswal flags macro risks in oil & gas; HPCL, GAIL, MGL top picks

The brokerage said INR depreciation of about 6% Y-o-Y in Q3 has weighed on margins of OMCs and CGD players, partly offsetting the benefit of softer crude oil prices.

Motilal Oswal on Oil & Gas sector: Domestic brokerage Motilal Oswal Financial Services Limited (MOFSL) expects macro headwinds to continue crimping the margin of safety across India’s oil and gas sector, even as select stocks offer relative value. 

 

Research analysts Abhishek Nigam and Rishabh Daga of Motilal Oswal said they prefer HPCL, GAIL and Mahanagar Gas (MGL) amid a challenging operating environment marked by currency weakness, volatile gas prices and moderating refining margins.

 

The brokerage said INR depreciation of about 6 per cent year-on-year (Y-o-Y) in Q3FY26 has weighed on margins of oil marketing companies (OMCs) and city gas distribution (CGD) players, partly offsetting the benefit of softer crude oil prices. At the same time, the recent spike in refining margins has proved transitory.

 

 

Refining margins surged in November 2025 due to supply dislocations and geopolitical risks, with Singapore gross refining margins averaging $9.8 a barrel, up 47 per cent month-on-month (M-o-M) and 63 per cent Y-o-Y. However, analysts noted that margins have since moderated as planned maintenance ended and incremental global capacity came onstream, limiting earnings upside from current levels.

 

Gas prices have added another layer of pressure. Henry Hub gas prices rose sharply, up 52 per cent Y-o-Y and 23 per cent quarter-on-quarter in Q3FY26, diluting the benefit of structurally lower domestic gas costs. Despite a meaningful correction in sector stocks (excluding OMCs) from recent peaks, the brokerage said valuations still do not reflect “maximum pessimism”, with most stocks trading near or above long-term average multiples. Only MGL, Indraprastha Gas (IGL) and BPCL are trading near one standard deviation below their mean valuations.  ALSO READ | Budget: Oil & gas sector seeks GST relief, LPG under-recovery compensation

Marketing preferred; excise concerns manageable

 

The brokerage, meanwhile, continues to prefer the marketing sub-sector. It has maintained a negative view on crude oil prices since June 2024, which has helped OMCs deliver petrol and diesel marketing margins above estimates. Additionally, LPG under-recoveries have fallen sharply to about ₹30-50 per cylinder in Q3FY26 from ₹100-170 per cylinder during FY25 and the first half of FY26.

 

Recent investor concerns around OMCs stem from the possibility of adverse excise duty tweaks ahead of the Union Budget, amid weak GST collections. However, the brokerage believes a modest duty hike of ₹1-1.5 per litre is unlikely to trigger a sharp de-rating, given strong underlying earnings momentum.

Neutral on refining, cautious on upstream

Despite recent strength in diesel cracks, Motilal Oswal reiterated a neutral stance on refining over FY27-28. Net global capacity additions of about 1 million barrels per day in CY26 are expected to outpace liquid demand growth of roughly 0.7 mb/d. Diesel cracks have already cooled from $30 per barrel in November 2025 to around $18 per barrel as capacity under maintenance resumes operations.

 

The brokerage remains least constructive on upstream companies, even though ONGC and Oil India trade near long-term average one-year forward price-to-book multiples. It has built in Brent crude prices of $60 per barrel for FY27-28, citing slower demand growth relative to supply and the risk of additional output from OPEC+. Rising exploration costs and dry-well write-offs could also lead to earnings downgrades.  ALSO READ | Motilal Oswal sector of the week: NBFC; AB Capital, Chola Finance top picks

City gas faces volatility

For CGD players, analysts believe currency movement and Henry Hub-linked gas prices remain key challenges. Motilal Oswal noted that MGL has the highest exposure to Henry Hub-linked gas, making it more reliant on price hikes. Under the revised unified zonal tariff effective January 1, 2026, IGL is expected to see a margin uplift, while MGL could face near-term pressure.

Motilal Oswal top bets

Among OMCs, Motilal Oswal prefers HPCL due to its higher exposure to marketing, reasonable valuation and LPG compensation of ₹6.6 billion per month through October 2026. GAIL is seen offering limited downside as valuations have corrected to around 1x one-year forward core price-to-book, supported by dividend yield, free cash flow visibility and a positive impact from the transmission tariff revision effective January 2026. The brokerage reiterated a ‘Buy’ on GAIL with a target price of ₹215. 

For MGL, Motilal Oswal expects volumes to grow at an 11 per cent CAGR over FY25-28. While near-term margins may face pressure from higher gas costs, this is largely priced in, it said, reiterating a ‘Buy’ with a target price of ₹1,645. 

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