Oil & Gas sector profit grows in Q2FY26 on inventory gains, but analysts see mixed outlook ahead

Experts point out that management commentary highlights key headwinds. OMCs, for example, are expected to receive only Rs 300 billion of LPG subsidy in 12 tranches starting November 2025, far short of the Rs 537 billion in under-recoveries as of September 2025, which are likely to rise further through winter. Additionally, ONGC, GAIL, and CGD have revised down their guidance.

India’s oil and gas sector led the earnings surge among Nifty 500 companies in Q2FY26, driving a 15 percent year-on-year rise in profits, while broader earnings growth across other sectors stood at 8 percent. The strong performance, according to analysts, was mainly driven by refiners and oil marketing companies, though they suggest that some gains for the sector were ‘on paper’ from inventory revaluations at the end of the quarter, not actual operational improvements.

According to Sumit Pokharna, VP-Fundamental Research at Kotak Securities, Reliance Industries remains the single largest earnings driver within oil & gas, despite telecom now contributing around 40% of its operating profit. The overall sector refining margins, he noted were stronger than anticipated at around 14.3%.

Inventory gains stand out

The most significant contributor this quarter, however, was inventory gains for OMCs. In oil & gas, companies buy crude at a certain price, process it, and whatever inventory is left at the end of the period is revalued at the current market price as per accounting norms. So if crude prices move up, the value of that inventory increases and profits shoot up. “Most people were actually expecting inventory losses, but instead the OMCs have reported large inventory gains,” Pokhran said, stressing that while these gains are part of the business model, they do not reflect efficiency improvements. For the top seven oil & gas companies, he explained that the expectation during the quarter was around Rs 41,000 crore of PAT, excluding inventory gains or losses. But with the actual inventory gains this quarter, reported PAT came in at around Rs 50,200 crore.

The structural picture for OMCs remains strong, most agree. A CRISIL note expects OMC operating profits to surge over 50% this fiscal to $18–20 per barrel, supported by stronger marketing margins as crude prices soften to $65–67 per barrel. Marketing margins are expected to rise to nearly $14 per barrel (Rs 8/litre), offsetting modest $4–6 per barrel refining margins. Cash accruals are projected at Rs 75,000–80,000 crore, supporting Rs 90,000 crore of capex focused on brownfield expansions, petrochemicals, and infrastructure. Sector leverage is expected to improve markedly, with debt-to-EBITDA falling to ~2.2x from 3.6x last year. CRISIL cautions, however, that geopolitical disruptions could still upset these assumptions.

On crude, Pokharna noted that upside is limited, but easing geopolitical tensions, which the market has not yet priced in, could drive meaningful downside.

Some challenges ahead

A report from Nuvama adds that while the sector benefited from refining performance, operational challenges persist in several pockets. ONGC reported a 3% YoY drop in EBITDAX due to lower crude realizations and higher operating costs. CGDs’ EBITDA fell 16% YoY after APM gas de-allocation, while GAIL posted a 15% YoY decline amid weak petrochemical spreads. Petronet LNG saw EBITDA fall 7%, hurt by a 5% drop in import volumes.

Experts point out that management commentary highlights key headwinds. OMCs, for example, are expected to receive only Rs 300 billion of LPG subsidy in 12 tranches starting November 2025, far short of the Rs 537 billion in under-recoveries as of September 2025, which are likely to rise further through winter. Additionally, ONGC, GAIL, and CGD have revised down their guidance.

Looking ahead, Nuvama remains cautious on ONGC, OMCs, CGDs, and GAIL, citing elevated capex, policy uncertainty, and weak demand trends. Experts also note that the sector remains vulnerable to government intervention if marketing margins expand too much. Rising CNG use, gradual EV adoption, and uncertainty over LPG subsidy reimbursements add further risk.

Valuation multiples across key sector players remain mixed. The average 1-year forward P/E for select companies is roughly 13–15x, with long-term P/E around 20x, reflecting a balance of growth prospects and policy risks. RIL trades at a premium, with a 23.8x 1-year forward P/E, while OMCs such as HPCL and BPCL are more moderately valued at 7–8x.

Optimism remains
Antique Stock Broking, however, maintains a positive view on OMCs heading into Q3FY26. Despite a temporary dip in auto-fuel margins, elevated product cracks, lower LPG under-recoveries, and ongoing subsidy payments are expected to keep EBITDA robust. LPG under-recoveries are projected to fall from Rs 98.5 per cylinder in Q2 to Rs 33 per cylinder in Q3, boosting earnings by roughly Rs 35 billion, while monthly subsidy payments contribute another Rs 50 billion.

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