Jefferies has highlighted a significant shift in the dynamics for Oil Marketing Companies (OMCs) following the Union Budget 2025, maintaining a cautious outlook on BPCL, HPCL, and IOCL. The brokerage notes that the government’s decision to budget LPG subsidies implies that OMCs will bear 69% of the FY25 under-recoveries on regulated products. This marks the first time in nine years that OMCs will have to shoulder such a substantial portion of these costs, indicating a shift in the government’s approach toward regulating fuel prices.
The move suggests that the government is capping the marketing profitability of OMCs, where superior margins from auto fuels will be partially negated by losses on LPG sales. This raises concerns over the profitability outlook for OMCs, especially if global crude oil prices rise sharply. In such a scenario, the narrowed margins on auto fuels combined with LPG losses could severely impact earnings.
Adding to these concerns, the budget has not provided any buffer for unexpected spikes in global crude prices, creating higher uncertainty regarding future profitability. The brokerage has consequently lowered valuation multiples for BPCL, HPCL, and IOCL, reflecting the increased risks and potential earnings volatility for these companies. The market is expected to react cautiously, given that any fluctuations in crude prices will now have a more direct impact on the financial health of these companies.
