Synopsis
Oil companies are expected to face continued challenges throughout FY27, mainly due to anticipated under-recoveries in Q1FY27, with LPG losses being a considerable problem. Although recent declines in crude prices provide short-term relief, continued market volatility and necessary inventory adjustments are expected to reduce profit margins. A notable threat is the government’s possible removal of excise duty cuts to alleviate the revenue shortfall.
YEARSOMC profits look weak as under-recovery in Q1FY27 takes hold: reportOil marketing companies are likely to remain under pressure throughout FY27 as under-recoveries in the first quarter of FY27 will weigh on profitability and the risk of excise duty cuts remains, domestic brokerage firm Prabhudas Lilladher said in a recent research report.
The company said near-term sentiment improved after Brent crude fell below $80/barrel following the US-Iran ceasefire, but continued price volatility and inventory replenishment are expected to limit further decline, keeping margins compressed.
The brokerage said Q1FY27 is expected to weigh heavily on profitability despite the recent respite. “We expect an under-recovery of Rs 7.0/litre and Rs 10/litre in Q1FY27, after considering an excise reduction of Rs 10/litre and capping cracks at USD 10/barrel and USD 15/barrel for MS and HSD respectively,” the report noted. LPG continues to remain the biggest problem, with losses estimated at around Rs 500/cyl for the first quarter of FY27. According to the Q4FY26 concall commentary cited by PL, OMCs reported LPG under-recoveries in the range of Rs 610-670/cyl in May 2026 compared to ~Rs 170/cyl in April 2026. Saudi CP prices for Q1FY27 are expected to increase by 47% QoQ, due to supply constraints due to disruptions in West Asia.
The brokerage said the excise tax cut remains a major risk to corporate profits. “The risk of an excise duty cut of Rs 10/litre remains a key pressure point for OMCs, although the reduction is expected to happen in a phased manner,” PL Research said. The excise reduction was introduced as a crisis management measure rather than a permanent change, and with the moderation of the crude price and the implementation of retail price hikes, the government could gradually withdraw this benefit. The government continues to bear a revenue impact of around INR 1.7 trillion per year due to the reduction in excise duties.
On crude, the broker expects a short-term decline but continued volatility. “If the situation between the United States and Iran develops positively and normalcy is restored in the Strait of Hormuz, crude prices could fall further. However, we expect crude oil prices to rise again as countries are expected to replenish their stocks and SPRs to maintain optimal resource levels, thereby creating additional demand in the market,” the report said.
Iranian oil exports are expected to resume immediately, but countries that used their strategic oil reserves during the conflict will likely begin to replenish their stocks, which will support prices.
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