OMCs decline as Budget omits LPG under-recovery compensation

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Oil marketing companies (OMCs) saw a decline on February 3 after the government refrained from announcing any compensation for under-recoveries on Liquefied Petroleum Gas (LPG). Analysts believe this omission has significantly impacted OMCs' earnings.

Indian Oil Corporation Ltd (IOCL) dropped by 2.6 percent, Bharat Petroleum Corporation Ltd (BPCL) declined by 4.4 percent, and Hindustan Petroleum Corporation Ltd (HPCL) fell by 7 percent. Meanwhile, India’s benchmark Sensex recorded a 0.55 percent decline while BSE Oil & Gas index lost 3.2 percent.

The under-recovery burden for OMCs stands at Rs 14,330 crore for IOCL, Rs 7,600 crore for HPCL, and Rs 7,230 crore for BPCL. Analysts noted that while the exclusion of LPG under-recovery in the Budget is a negative development, the government retains the option to compensate OMCs through supplementary grants. In the last instance of LPG compensation, the government allocated Rs 22,000 crore to OMCs in October 2022 to cover under-recoveries for FY21 and FY22.

For FY26, the LPG subsidy has been budgeted at Rs 14,700 crore for FY25RE, up from Rs 11,900 crore in FY25BE, and Rs 12,100 crore for FY26 BE. This remains unfavorable for OMCs, as their potential LPG losses could range between Rs 35,000 crore and Rs 40,000 crore in FY 2025. Reports indicate that the oil ministry had requested LPG compensation of around Rs 40,000 crore for OMCs.

However, the impact of lower LPG compensation is partially mitigated by the government's decision not to raise excise duty on auto fuels. The FY26 BE for excise duty is estimated at Rs 3,17,000 crore, a marginal 4 percent increase from the FY25 RE of Rs 3,05,000 crore. According to JM Financial, there was scope for an excise duty hike of Rs 3-4 per liter on auto fuels.

OMCs currently maintain a gross marketing margin of Rs 6.0 per liter on diesel and Rs 9.7 per liter on petrol, leading to a blended auto-fuel Gross Marketing Margin (GMM) of Rs 7.2 per liter, significantly above the historical average of Rs 3.5 per liter. The weighted average integrated gross margin on auto fuels stands at Rs 13.5 per liter, compared to the historical integrated margin of Rs 11.7 per liter, assuming a 1:1 ratio of marketing to refining volume, as per JM Financial.

Jefferies India highlighted that the government’s budgeted LPG subsidy suggests OMCs will bear 69 percent of FY 2025 under-recoveries on regulated products—the highest burden in nine years. The move signals that the government has effectively capped OMCs' marketing profitability, as higher margins on auto fuels are being offset by LPG losses.

Furthermore, OMC profitability faces heightened uncertainty if crude oil prices rise sharply, which could compress auto-fuel margins in the future. This scenario may lead to lower valuation multiples for BPCL, HPCL, and IOCL, Jefferies report added.