Oil & Gas – Sector Update – OMCs – not out of the woods yet

After 3.5 months of one of the worst energy shocks in recent history, we see some positivity as the US-Iran ceasefire deal finally gets signed, although uncertainty remains, especially over the nuclear deal. Brent crude dropped below ~USD80/bbl, its lowest level since Mar’26, providing a positive respite for OMCs. Q1FY27 is expected to weigh sharply on profitability, impacting earnings for the full year. We expect an under-recovery of Rs7.0/ltr and Rs10/ltr in Q1FY27, after considering a Rs10/ltr excise cut and capping of cracks at USD10/bbl and USD15/bbl for MS and HSD respectively. Additionally, LPG continues to remain a key pain point, with losses estimated at around Rs500/cyl for Q1FY27. As per Q4FY26 concall, OMCs reported LPG under-recoveries in the range of Rs610-670/cyl in May’26 vs ~Rs170/cyl in April’26. Saudi CP prices for Q1FY27 are expected to increase by ~47% QoQ, driven by supply constraints due to the West Asia disruption. The overhang of a rollback in excise duty cuts of Rs10/ltr remains a key pressure point for OMCs, although the rollback is expected to happen in a phased manner. If the US-Iran situation progresses positively and full normalcy is restored at the Strait of Hormuz, crude prices may soften further. However, we expect crude oil prices to rise again as countries are expected to replenish inventories and SPRs to maintain optimum resource levels, creating incremental demand in the market. As a result, we downgrade IOCL & BPCL to “Reduce” and HPCL to “Hold” from “Accumulate” as near-term earnings visibility remains weak. We lower the multiples accordingly from 0.8x, 1.2x, and 1.3x to 0.7x, 1.1x, and 1.2x based on FY28E PBV, arriving at a TP of INR126/384/291/share for IOCL/HPCL/BPCL respectively