Profitability at state-run oil marketing companies (OMCs) is expected to improve as declining crude oil prices boost fuel marketing margins, although rising debt levels and uncertainty over future fuel taxes could weigh on the sector’s longer-term earnings outlook, according to a JP Morgan report.The brokerage said composite margins on petrol and diesel sales at state-run refiners and fuel retailers have risen above levels seen before the recent West Asia conflict.The improvement has been driven by lower crude prices and reduced central excise duties.The conflict in the Middle East had pushed global oil prices higher, while retail fuel prices in India remained largely unchanged for much of the period and increased only partially despite rising costs.“Our estimates for OMC composite margins on petrol and diesel are now higher than pre-war levels. Losses on LPG are still elevated, but should also start to track oil down soon,” JP Morgan said.
Margins recover, but first-quarter earnings may remain weak
According to the report, earnings for the April-June quarter are likely to be impacted by significant inventory losses resulting from the recent fall in crude oil prices.However, profitability is expected to improve from the second quarter onwards.JP Morgan cautioned that two factors could limit enthusiasm over the improving outlook. “The OMC will have acquired material debt during the last few months — affecting valuations, and a major part of the restoration of profitability is on account of the reduction in excise duties,” it said.The government had reduced excise duty on petrol and diesel by Rs 10 per litre each in March to cushion consumers from rising fuel costs.The report noted that duties could be restored once global oil prices stabilise at lower levels.Among the three state-owned OMCs, Bharat Petroleum Corporation Limited, Indian Oil Corporation and Hindustan Petroleum Corporation Limited, BPCL and IOC are expected to benefit the most if crude prices continue to soften.
Tax policy remains key risk
JP Morgan estimates that BPCL and IOC currently enjoy composite petrol and diesel margins higher than pre-conflict levels, while HPCL’s margins have largely recovered to or surpassed pre-spike levels.The report also said LPG losses remain substantial but should begin easing as lower oil prices filter through.A major contributor to the recovery has been the government’s decision to keep excise duties lower, allowing a greater share of retail fuel prices to accrue to OMCs. Analysts estimate that the reduction in excise duties has resulted in roughly Rs 1.8 lakh crore in annual forgone revenue for the government.The brokerage said the government may allow OMCs to retain higher margins for some time to help reduce debt accumulated during recent periods of under-recovery. However, pressure to increase fuel taxes could return as government spending commitments rise over the next two fiscal years.
Fuel price outlook
The report comes days after Union petroleum minister Hardeep Singh Puri indicated that petrol and diesel prices could be reduced once lower-priced crude oil purchased recently reaches Indian refiners.JP Morgan expects OMCs to post stronger earnings in the December and March quarters if crude prices remain below $80 per barrel and refining margins stay elevated.However, it warned that visibility on fuel marketing margins beyond FY2028 remains limited, making the sector heavily dependent on crude oil movements and government tax policy.The brokerage identified BPCL and IOC as its preferred picks in the current environment.