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Higher OMC profitability in H2FY25 to offset LPG subsidy impact for the year

In the absence of government support as yet, the LPG subsidy continues to weigh heavily on OMCs. We expect subsidy impact to touch ~Rs400bn by FY25. With H1FY25 having already impacted OMCs with Rs 174.9bn, H2FY25 will see an incremental impact of ~Rs225bn. As per our scenario analysis, if government provides 60% of the shortfall, the FY25 EBITDA could significantly surpass consensus estimates. Even in the event of a worst-case scenario of zero government aid, the robust H2FY25 performance driven by strong GRMs and healthy marketing margins could help offset the said impact.

LPG subsidy burden impact on OMCs

The LPG subsidy mechanism in India has long been a cornerstone of the government’s efforts to provide affordable cooking gas to households, particularly to rural and economically weaker sections. Under this system, OMCs are reimbursed for a portion of the subsidy cost, with the government covering the rest. However, in recent years, rising global energy prices, higher domestic consumption, and higher extended subsidy for households have sharply escalated subsidy requirements

The LPG subsidy burden has emerged as a significant issue for OMCs who sustained an impact of Rs 174.9bn in H1FY25 that dented their profitability in the absence of government support. However, based on our calculations, the actual subsidy requirement for FY25 is expected to reach ~Rs400bn, resulting in a further impact of ~Rs225bn in H2FY25. Assuming a distribution of the subsidy burden across IOCL, BPCL, and HPCL in the ratio of 49%/25%/26%, the respective impacts on these companies could be Rs195.7bn, Rs102bn, and Rs102.4bn for FY25 (H1FY25 burden stood at Rs bn 88.7/41.2/45). There is yet no clarity from the government on the earmarked volume of petroleum subsidy.

Following our understanding and analysis, we have tried to estimate the likely government subsidy to OMCs and the amount to be borne by the latter. Given the likelihood of a strong QTD Q3FY25 performance and a better Q4 outlook, the OMCs could report super normal profits which could more than offset most of the LPG subsidy impact.

Scenario analysis: HPCL and BPCL well placed, IOCL could take a hit

If the government provides ~60% (base case) of the requirement, OMCs would need to absorb the remaining ~Rs160bn. Consequently, FY25 EBITDA will be Rs413.2bn for IOCL, Rs286.8bn for BPCL, Rs207.2bn for HPCL, significantly above Bloomberg consensus of Rs404.6bn, Rs243.6bn, Rs149.4bn respectively. If government provides ~80% (Rs320bn) of the shortfall (bull case), the OMCs will have to bear Rs80bn resulting in FY25 EBITDA of Rs452.4bn for IOCL, Rs307.1bn for BPCL, and Rs227.7bn for HPCL, warranting an upward revision in estimates. If we assume dynamics to be fully against OMCs marked by NIL government support (bear case), OMCs will need to bear Rs400bn resulting in FY25 EBITDA of Rs295.9bn for IOCL, Rs225.4bn for BPCL, and Rs145.8bn for HPCL, indicating a downward revision in estimates for IOCL, while keeping other two at par.

Our View

OMCs are likely to make the most of a buoyant H2FY25 to report better performance than their last 5-year averages. We believe HPCL and BPCL could outperform expectations based on our H2 calculations. In a worst-case scenario, of no government support, HPCL and BPCL could report EBITDA as per the consensus expectations, but we foresee a 40% sharing by OMCs which would revise HPCL and BPCL EBITDAs upwards by 39%/18% respectively. We stay bullish on OMCs but prefer HPCL and BPCL over IOCL, given its limited upside potential.

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