OMC stock looks undervalued, but fundamentals tell a different story

Copyright © HT Digital Streams Limited All rights reserved. While marketing margins are volatile, Indian OMCs’ profits are driven by integrated margin, which involves both refining and marketing. (File Photo: Mint) Summary Diesel margin volatility has spooked investors, but lower crude oil prices, falling LPG under-recoveries and rising Russian oil discounts point to stronger underlying performance than market sentiment suggests. Shares of India’s state-owned oil marketing companies (OMCs) have fallen 6-9% in the past month, hit by recent volatility in marketing margins. The margin on diesel fell to an 18-month low of negative ₹0.3 per liter in the third week of November amid US sanctions against Russian firms that disrupted diesel exports. Still, the selloff in these stocks appears to be sentiment-driven rather than rooted in fundamentals, given the gains from low crude oil prices, unchanged retail prices and the drop in LPG under-recoveries. Brent crude currently trades around $62 per barrel, compared with around $67 per barrel in the half year ended September (H1FY26) and $79 per barrel in FY25. Several brokers remain optimistic. “We feel street expectations remain broadly in line with the run rate seen in Q3FY26, which is likely to continue into Q4,” Antique Stock Broking noted in a Dec. 10 report. The broker raised its FY26 Ebitda estimates by 7%, 10% and 1% for Hindustan Petroleum Corp, respectively. Ltd (HPCL), Bharat Petroleum Corp. Ltd (BPCL), and Indian Oil Corp. Ltd (IOCL) – the three OMCs – increased. The combined Ebitda of the three OMCs is expected to grow by 66% y-o-y in FY26, following the 46% decline seen in FY25. While marketing margins are volatile, Indian OMCs’ profits are driven by integrated margin, which involves both refining and marketing. “We argue that while the discussion on marketing margins drives sentiment and stocks, the structure of earnings and an integrated margin trend provide comfort,” an ICICI Securities report said. It estimates H2FY26 integrated margin to be broadly in line, or marginally higher than H1 figures of ₹8-10 per litre. Moreover, lower crude oil prices have also helped reduce LPG under-recovery, which is projected at ₹16,000 crore in FY26, well below ₹40,000 crore seen in FY25. Domestic consumers receive LPG cylinders from OMCs at regulated prices, with the government paying the difference. In the September quarter (Q2FY26), LPG under-recoveries stood at ₹4,500 crore, down from around ₹8,000 crore a year ago. The companies also started receiving payments from November against their previous year’s LPG under-recoveries. In August, the government approved repayment of ₹30,000 crore, to be split into 12 monthly installments. This implies incremental cash inflows of ₹12,500 crore in the last five months of FY26. Another factor helping OMCs is the discount on Russian crude oil, which rose to about $7 a barrel in November, according to a Nomura Global Markets Research report dated Dec. 2, from $2-3 a barrel in Q2. While purchases of Russian oil have fallen sharply due to US sanctions, Indian refiners are exploring other possible alternatives. “Indian refiners may also gradually find ways to shift to non-sanctioned Russian entities, use shadow carriers, adopt ship-to-ship transfers, etc. in the future to balance geopolitical and economic considerations,” Nomura said. All told, shares of BPCL, HPCL and IOC trade at enterprise value to FY26 estimated Ebitda ratio of 5.6x, 5.8x and 6.5x respectively, below their 10-year average multiples. Investors will watch the crude price track, marketing margins on petroleum products, imports from Russia and rupee depreciation for further clues. However, the biggest risk for OMC investors remains any government decision to pass on the benefit of softer crude oil prices to consumers by reducing retail fuel prices. Get all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download the Mint News app to get daily market updates. more topics #crude oil #crude prices #OMCs #Russian Oil #market to maket Read next story