Shares of oil marketing companies (OMCs) such as Hindustan Petroleum, Bharat Petroleum and Indian Oil recorded gains in trade on Monday, August 11, after the Centre approved a compensation package of Rs 30,000 crore for the under-recoveries on LPG.
The government decided to compensate the OMCs for the cumulative losses incurred on LPG under recoveries over FY24, which was roughly around Rs 40,000 crore. This brings material relief to the financial prospects for the three OMCs: IOC, BPCL, and HPCL.
At 9.50 a.m., shares of Indian Oil were quoting Rs 141.36 on the NSE, higher by one percent. BPCL's shares gave up its intraday gains to quote Rs 319.75, trending near the unchanged mark. HPCL was higher by 60 basis points at Rs 412.05 per share.
According to domestic brokerage JM Financial, the move is a significant positive for OMCs as it far exceeds the expectation of Rs 10,000-15,000 crore and is equivalent to ~9.1 percent/7.3 percent/5.5 percent of market cap for HPCL/IOC/BPCL.
"Despite the lack of clarity, we believe that Rs 30,000 is meant to compensate OMCs for their FY25 LPG under-recoveries of Rs 41,300 crore; it may partly be for their FY26 estimated LPG under-recoveries of ~Rs 20,600 crore as well," the brokerage added.
ICICI Securities concurred, noting that LPG losses were a major drag on earnings in FY25; even for Q1FY26, losses are estimated at ~Rs 80,000 crore or so. "Lower LPG prices, price increase of Rs
50/cylinder and now the decision to compensate for a significant portion of accumulated losses are material positives for OMCs."
However, the broking house added that while the compensation of LPG losses is one material hit taken care of, there are believe other factors are also far from dire:
- Overall product demand may still grow between 0.7-1mb/d for CY25,
- Retail fuel margin, while lower than Q4 records, is still on track to be the second highest annually in FY26,
- Balance sheet (leverage) is at a fairly resilient level, despite the high capex seen in OMCs.
"We see near-term pressures on OMC earnings due to declining GRMs and retail margins, as evidenced by recent weaker-than-expected results from other players. However, with this recent decision to compensate for LPG losses, we see a positive medium- to long-term demand outlook, still healthy retail margins, and compelling valuations underpinning our continued optimism on the three names," said ICICI Securities.
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