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OMCs are navigating a mixed financial landscape with contrasting trends being witnessed across their operations. While under-recoveries on the sale of LPG remain a challenge due to elevated propane prices and government imposed price controls, the outlook for refining margins and marketing margins on petrol and diesel remains optimistic in the near term. Although the long-term outlook remains uncertain given weak demand prospects and possibility of fuel price cut, we see short-term positivity led by strong Q3 if current scenario continues. However, from 1-year perspective, we maintain HOLD rating on IOCL/BPCL with a TP of Rs153/301 valuing them at 1/1.4x avg FY26-27 P/BV and re-rate HPCL to HOLD post run-up in stock with a TP of Rs392 valuing it at 1.3x avg FY26-27 P/BV.

LPG under-recovery – Return of government control: OMCs have been consistently absorbing LPG under-recoveries since Sept’23, driven by high propane prices and subsidized retail rates. As on 30th Sep’24, the companies absorbed a cumulative loss of Rs174.9bn with IOCL/BPCL/HPCL reporting individual under-recoveries of Rs45/88.7/41.2bn in H1FY25. In Q3FY25, we expect these losses to widen further with rising propane prices with an estimated underrecovery of Rs212/cylinder

However, GMMs on auto fuels save the day: As per our calculations, GMMs on petrol/diesel continue to remain strong due to lower international prices with an average margin of Rs13.6/9.7/ltr for Q3-TD (vs Rs9.8/6.3/ltr in Q2) respectively. For the week ended 30th Nov, petrol/diesel margins stood at Rs14/9/ltr. Thus, GMMs on petrol/diesel are expected to remain strong in the near term. A rise of Rs1.7- 1.8/ltr in petrol/diesel margins will compensate for a US$1/bbl decline in GRMs as well as Rs100/cylinder under-recovery in LPG.

Rebounding GRMs also supportive: Singapore GRMs, which were weak in Q2, have started recovering in Q3 and are currently at US$6.5/bbl. Average Singapore GRM for Q3-TD stands at US$4.9/bbl (vs US$3.6/bbl in Q2). While falling crude oil prices may lead to inventory losses during the quarter, current GRMs bode well for the quarter.

Marginal improvement in debt profile: On a consol basis, debt levels of IOCL/BPCL/HPCL as of H1FY25 stood at Rs1,535/492/685bn. Factoring in the improvement in GRMs, strong marketing margins and LPG under-recoveries we forecast their debt at Rs1,444//486/647bn at FY25E-end..

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