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The government of India (GoI) has approved INR 300bn compensation to OMCs in respect of LPG under-recoveries to help them meet their capex, debt servicing, etc. The amount is payable in 12 tranches but the government has not clarified the timeframe over which it will be disbursed. This is a significant positive for OMCs as it far exceeds the expectation of INR 100bn-150bn and is equivalent to ~9.1%/7.3%/5.5% of market cap for HPCL/ IOCL/BPCL. Despite the lack of clarity, we believe that INR 300bn is meant to compensate OMCs for their FY25 LPG under-recoveries of INR 413bn; it may partly be for their FY26 estimated LPG under-recoveries of ~INR 206bn as well. Separately, GoI has also approved INR 120bn LPG subsidy for FY26 for PMUY LPG consumers; this is neutral for OMCs as the PMUY LPG underrecoveries is fully compensated by the government every year.

We upgrade our rating on IOCL to HOLD from SELL (revised TP of INR 135) on valuation grounds as it is trading at ~0.9x FY27 PB (in line with historical average) after the recent correction; further, it’s likely to see strong earnings growth over FY27-28 due to refining capacity expansion by 18mmtpa or 25% in next 12 months. We maintain HOLD on BPCL (revised TP of INR 305) as it is trading at ~1.3x FY27 PB (not at a significant premium to its historical multiple of ~1.2x); however, its aggressive capex plan (~INR 1,500bn capex over 5 years) prevents us from taking a constructive view. We maintain SELL on HPCL as: a) it is trading at a significant premium to historical valuations (1.35x FY27 PB vs historical average of ~1.1x); b) its huge INR 730bn Rajasthan refining project may earn single-digit RoCE due to significant time/cost escalation; and c) we believe OMCs’ integrated refining cum marketing margin will normalise around historical levels as the government may retain the benefit of any sustained fall in crude price via excise duty hike and/or fuel price cut.

* GoI approves INR 300bn compensation to OMCs in respect of LPG under-recoveries; to support OMCs meet their critical requirements like capex, debt servicing, etc.:

GoI has approved INR 300bn compensation to OMCs (oil marketing companies) in respect of LPG under-recoveries as global LPG prices remained high “during FY25 and continues to remain high”. It added that this compensation will be paid in 12 tranches, but didn’t clarify the timeframe. Further, GoI said that this compensation will allow OMCs to continue meeting their critical requirements such as crude and LPG procurement, servicing of debt, and sustaining their capex, underlining its commitment to protect consumers from volatility in global energy markets while maintaining the financial health of OMCs. Separately, in an interview, India’s Information and Broadcasting Minister said that this support is being given keeping in mind the current geopolitical scenario and uncertainties in the oil and gas sector.

* Significantly +ve for OMCs as INR 300bn compensation exceeds expectation of INR 100bn-150bn; equivalent to ~9.1%/7.3%/5.5% of market cap for HPCL/ IOCL/BPCL:

This approved LPG compensation of INR 300bn is a significant positive for OMCs as it exceeds the consensus expectation of INR 100bn-150bn compensation, given that OMCs earned ~INR 250bn-300bn extra auto-fuel marketing margin in FY25 as a) their FY25 auto-fuel marketing was higher at ~INR 6.5/ltr (vs. historical INR 3.5/ltr) and b) their FY25 integrated auto-fuel marketing was also higher at ~INR 14.1/ltr (vs. historical INR 12.1/ltr) despite factoring in lower GRM – Exhibit 3. Our calculations suggest that this compensation (of INR 300bn) is likely to be distributed among OMCs as: a) ~INR 145bn to IOCL (equivalent to 7.3% of its current market cap); b) ~INR 79bn compensation to HPCL (equivalent to 9.1% of its current market cap); and c) ~INR 76bn compensation for BPCL (equivalent to 5.5% of BPCL's current market cap) – Exhibit 1.

* INR 300bn is for compensation of OMCs’ FY25 LPG under-recoveries of INR 413bn; may also be partly for their FY26 estimated LPG under-recoveries of ~INR 206bn:

There is lack of clarity on whether this INR 300bn compensation is solely to cover the LPG underrecoveries of FY25 or also towards potential FY26 LPG under-recoveries. We believe this is largely to compensate for FY25 LPG under-recoveries of INR 413bn; however, this may also be to partly compensate for FY26 estimated LPG under-recoveries of ~INR 206bn (1QFY26 LPG under-recovery is likely to be ~INR 86bn based on HPCL’s 1QFY26 results; FY26 under-recovery is likely at ~INR 206bn assuming that the current low global LPG price continues and domestic LPG price is unchanged- Exhibit 1). Earlier in Oct’22, GoI had announced INR 220bn compensation to OMCs for LPG under-recoveries of INR 283bn incurred between Jun’20 and Jun’22.

* GoI also approves INR 120bn LPG subsidy for FY26 for PMUY LPG consumers; neutral for OMCs as the PMUY LPG under-recoveries are fully compensated by GoI every year:

Separately, GoI also announced an LPG subsidy of INR 120bn for FY26 under Pradhan Mantri Ujjwala Yojana (PMUY), continuing the INR 300/cylinder subsidy given to 103.3mn PMUY households (for upto 9 cylinders p.a.). Please note that this scheme was launched in May’16 to provide deposit-free LPG connections to adult women from economically weaker households. However, this is neutral for OMCs as these LPG under-recoveries are fully compensated by GoI every year.

* Upgrade IOCL from SELL to HOLD on valuation ground; maintain HOLD on BPCL and maintain SELL on HPCL:

: We have raised our FY26 EBITDA estimates by ~30% for IOCL and BPCL, and by ~39% or HPCL to account for the INR 300bn LPG compensation in FY26 while the estimate for FY27-28 is largely unchanged. Hence, our TP has increased by 3-6% to INR 135 (from INR 130) for IOCL; to INR 305 (from INR 295) for BPCL; and to INR 350 (from INR 330) for HPCL. We upgrade our rating on IOCL to HOLD (from SELL) on valuation grounds as its trading at ~0.9x FY27 PB (in line with historical average) after the recent correction; further, it’s likely to see strong earnings growth over FY27-28 due to refining capacity expansion by 18mmtpa or 25% in next 12 months. We maintain HOLD on BPCL as it is trading at ~1.3x FY27 PB (not at a significant premium to its historical multiple of ~1.2x); however, its aggressive capex plan (~INR 1,500bn capex over 5 years) prevents us from taking a constructive view on the stock at this valuation. We maintain SELL on HPCL as: a) it is trading at a significant premium to historical valuations (1.35x FY27 PB vs. historical average of ~1.1x); b) its huge INR 730bn Rajasthan refining project may earn single-digit RoCE due to significant time/cost escalation; and c) we believe OMCs’ integrated refining cum marketing margin will normalise around historical levels as the government may retain the benefit of any sustained fall in crude price via excise duty hike and/or fuel price cut to pass on the benefit of lower crude price to endconsumers.

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