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The 2QFY27 outlook for OMCs is sequentially better than 1QFY27, despite continued volatility stemming from the Middle East (ME) conflict. 1Q saw a significant beat in core GRMs, supported by elevated refining cracks, but this was more than offset by mounting marketing under-recoveries. Marketing economics, however, have improved sequentially, supported by the full impact of auto-fuel/LPG price hikes, sequentially lower average crude oil prices following the sharp correction in the first half of Jul-26, and a sharp decline in LPG under-recoveries. However, crude has spiked again to ~$98/bbl amid renewed escalation in the ME, and the situation remains volatile. We expect LPG under-recoveries to average ~Rs290/cylinder in 2Q vs ~Rs510/cylinder in 1Q, while our initial estimates imply OMC integrated margins of ~Rs9-14/liter in 2Q vs ~Rs1-3/liter in 1Q (current margins at ~Rs5-9/liter), with HPCL likely to see the highest positive delta. Overall, we expect 2Q earnings to improve sequentially, but continued escalation in the ME and volatile crude prices pose risks to our full-year earnings estimates. We retain a neutral view and our ADD rating on OMCs.

Better marketing margins and elevated refining cracks to drive 2Q recovery

2QFY27 has seen a sequential recovery in auto-fuel marketing margins, as crude prices declined sharply in the first half of the quarter (low: ~$68/bbl) amid easing ME tensions, before rising again to ~$98/bbl currently. The full impact of auto-fuel price hikes has also supported margins, while LPG under-recoveries are expected to decline sharply to ~Rs290/cylinder in 2Q (Jul/Aug/Sep at ~Rs490/180/200 per cylinder) from ~Rs510/cylinder in 1Q, aided by a ~19% qoq decline in Saudi CP, lower spot premiums, and the full benefit of the price hikes. ATF marketing margins have also improved sequentially, aided by price hikes undertaken by OMCs in 2Q vs largely frozen pricing in 1Q. Refining cracks have remained elevated amid refinery disruptions in Russia (~40% of capacity offline) and the ME, with diesel particularly strong as outages have tightened product availability.

1Q weakness partly cushioned by refining; 2Q outlook improves

1QFY27 was a challenging quarter for OMCs, as a sharp rise in crude prices and elevated premiums/freight costs weighed significantly on marketing profitability, partly offset by strong refining cracks. The extent of the refining cushion, however, varied across companies, with IOCL and BPCL delivering relatively resilient performances as strongerthan-expected GRMs absorbed marketing losses, while HPCL was weaker due to operational issues at the Vizag refinery’s resid project, which persists. Across all three, balance sheets also came under pressure from higher working-capital requirements amid elevated crude prices. While 2Q earnings should be better than 1Q, the continued escalation in the ME leaves the earnings trajectory below our initial expectations and poses downside risk to our full-year earnings estimates.

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