Shares of the state-owned Oil Marketing Companies (OMCs)—Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL), and Bharat Petroleum Corporation Ltd (BPCL)—are facing negative outlooks from market analysts. This comes despite a notable decline in crude oil prices, which have recently hit a four-year low amid global economic concerns. Analysts warn that the high profit margins on auto fuels may not last long, with the government likely to increase excise duties on petrol and diesel.

Concerns Over Auto Fuel Margins

Market observers believe that the current favorable auto fuel marketing margins enjoyed by Indian OMCs could be short-lived. The government may react to lower crude prices by raising excise duties or adjusting fuel prices, as historical trends suggest. This potential shift poses risks to the sustainability of profits for these companies, especially when considering the ongoing challenges posed by LPG under-recoveries and uncertainties surrounding the Russian crude discount.

• Current Auto Fuel Margin: As of now, with crude priced at $66 per barrel, OMCs are achieving an auto fuel marketing margin of ₹11 per litre. This is a significant increase from the historical average of ₹3.5 per litre (or ₹5.1 per litre, when accounting for LPG losses).

The Impact of Crude Oil Discounts

A recent report from JM Financial highlights that while lower crude prices could enhance OMCs’ marketing margins, these levels may not be sustainable. Analysts point out that the discount for Russian crude has decreased, moderating to $1.1 per barrel in January 2025, down from $2.6 per barrel the previous month. Notably, Russian crude now accounts for 36.4% of India’s crude imports, an increase from 32% in December 2024, reflecting a significant shift in sourcing post-Ukraine invasion.

Future Projections and OMC Strategies

During a recent earnings call for IOCL, the management indicated that the discount on Russian crude has dropped to between $1 and $1.5 per barrel. They noted that the share of Russian crude in India’s imports is likely to decrease further due to potential U.S. sanctions. However, management emphasized that it is too early to speculate on the complete cessation of Russian crude imports.

Valuation Concerns for OMCs

JM Financial has issued a Sell rating for HPCL, setting a target price of ₹320 per share, and a similar rating for IOC with a target of ₹125 per share. Meanwhile, BPCL holds a Hold rating with a target price of ₹295. Analysts believe that the integrated refining and marketing margins of OMCs will eventually revert to historical levels, as the government is likely to leverage any prolonged drop in crude prices to adjust excise duties or fuel prices, passing benefits onto consumers.

Positive Outlook for Oil India and ONGC

In contrast, JM Financial remains optimistic about Oil India and ONGC, maintaining a BUY rating for both. The target price for Oil India remains at ₹500, while ONGC is targeted at ₹290. This positive perspective is grounded in a projected Brent crude price of $70 per barrel, with expectations of production growth of about 12% to 25% over the next few years.

• Earnings Growth Factors: Oil India’s growth is expected to be bolstered by the expansion of the NRL refinery, which will increase capacity from 3 million metric tonnes per annum to 9 million metric tonnes per annum by December 2025.

Conclusion

While the current environment presents challenges for Indian OMCs, particularly regarding fuel marketing margins and crude pricing dynamics, there remains a sense of cautious optimism for other industry players like Oil India and ONGC. The evolving landscape of crude oil pricing and government policy will continue to play a pivotal role in shaping the future of these companies.