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Central government focuses on ensuring sustainable returns for OMCs

* The central government on 7th Apr’25 increased 1) excise duty on petrol (MS) and diesel (HSD) by INR2/lit, and 2) the price of domestic LPG cylinders by INR50. The increase in excise duty will affect OMCs’ marketing margins, though we do not expect any impact on our earnings estimates as the current marketing margins, averaging above ~INR10/lit, are significantly above our assumption of INR3.3/lit for both MS/HSD. Additionally, the price increase of INR50 per domestic LPG cylinder will bring down LPG under-recovery from ~INR189/cyl to ~INR144/cyl, given stable propane prices. Further, propane prices are expected to soften from Apr’25 as heating demand wanes. We believe that this balanced approach highlights the government’s focus on sustainable returns for OMCs.

* At 1.1x FY27E P/B, HPCL remains our preferred pick among OMCs. Additionally, the start of its Bottom Upgrade Unit at Visakhapatnam should cushion the impact of deteriorating GRM fundamentals in FY26.

Government hikes excise duty on petrol and diesel by INR2/lit

* As per media reports, the central government has increased excise duty on both MS and HSD by INR2/lit. According to the article, the increase in excise duty is unlikely to affect Indian consumers and is expected to be absorbed by OMCs.

* In May’20, excise duty on MS/HSD was increased by INR10/INR13 per liter (link). However, later in Nov’21 and May’22, the central government reduced excise duty on MS/HSD cumulatively by INR13/INR16 per liter (link).

* While the current marketing margins remain robust, averaging above INR7.5/lit for both MS/HSD in 4QFY25, we are modelling INR3.3/lit margins for both MS/HSD. Hence, we do not foresee any earnings impact from this excise duty hike for us. Further, upside risks to OMC earnings remain even after this excise duty hike.

Central government increases LPG cylinder price by INR50

* According to a media article, w.e.f. 8th Apr’25, the price of LPG cylinders has been hiked by INR50 for both subsidized and non-subsidized users.

* The current LPG under-recovery of ~INR189 per cylinder will decline to ~INR144 per cylinder, given stable propane prices. Additionally, propane prices are expected to come off after Apr’25 as heating demand wanes.

* As of 31st Dec’24, HPCL/BPCL/IOCL had a cumulative negative net buffer on account of LPG losses amounting to ~INR76b/INR72b/INR143b.

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