What’s driving the improvement
- Analysts expect OMCs in India to see a revival in earnings in the second half of FY 2024‑25 (H2) due to stronger marketing margins (on petrol/diesel), stabilised retail prices, range‑bound crude and improving refining margins. (The Economic Times)
- For example, one report states: “Strong marketing margin and higher profitability, how OMC stocks look oiled up for revival in second half of FY 2025” noting that steady retail fuel prices + range‑bound crude prices will support marketing margins. (The Economic Times)
- On refining margins: In Asia‑Pacific, ratings agency Fitch indicates “rising demand and very high refinery capacity utilisation will help to drive improved EBITDA margins for our rated Indian R&M companies.” (Fitch Ratings)
- Also: one article suggested that “benign crude, high refining margins to boost OMCs earnings in Q1 FY26” in the Indian context. (The Financial Express)
- LPG incentives/subsidy burdens have been a drag but improvements or mitigation in under‑recoveries are expected to relieve pressure. For example, one note: “LPG burden will continue to remain significant in the second half. … Nevertheless, healthy refining and marketing margins are likely to offset the impact of under‑recoveries even in a worst‑case scenario of zero government aid.” (The Economic Times)
Case Study A: Marketing Margin Recovery for Indian OMCs
Situation:
- In the September quarter, Indian OMCs faced weak marketing margins (due to product cracks narrowing, weak diesel/petrol margins) and substantial LPG under‑recoveries. (The Economic Times)
- The refining segment was also under pressure (e.g., Singapore GRMs averaged US$3.7/bbl in Q2 versus US$9.6/bbl in the prior year). (The Economic Times)
Turning Point:
- Analysts pointed to “steady retail prices of petrol and diesel, coupled with expectations of range‑bound crude oil prices” as key supports that will elevate the marketing margins in H2. (The Economic Times)
- For example: in an article May 2025 – “Benign crude, high refining margins to boost OMCs earnings in Q1 FY26”. (The Financial Express)
Impact:
- With marketing margins improving, OMCs expect better profitability even if there are continuing burdens from LPG under‑recoveries.
- Marketing margin uplift can provide a cushion against subsidy or inventory losses.
Lesson:
- For downstream companies: retail fuel marketing margins (the difference between pump price and landed cost) are as important as refining margins.
- Stabilised retail pump pricing policy + controlled crude cost environment = stronger margin tailwind.
- Even if burdens (like LPG under‑recoveries) persist, companies with strong marketing margin buffers can absorb those better.
Case Study B: Refining Margin & LPG Incentives Contribution
Situation:
- Refining margins globally have been under pressure, but studies show improvement ahead: for example, APAC refining & marketing margin recoveries are “set to diverge” in late 2025. (Fitch Ratings)
- In the Indian context, LPG under‑recoveries have been a major drag: one estimate in Dec 2024 said an additional burden of ~₹22,500 crore for OMCs in H2, though margins may offset this. (The Economic Times)
Turning Point:
- If refining margins recover (due to higher utilisation, supply disruptions, stronger crack spreads) and marketing margins remain strong, the combined effect becomes substantial.
- LPG incentive schemes (such as government subsidies or rationalisation in under‑recoveries) would relieve burden and enhance net profit impact.
Impact:
- The dual tailwinds of refining + marketing margin expansion mean OMCs’ earnings could see significantly improved H2 performance.
- For example, one article in 2021 (though older) said OMCs “could be in for rerating on strong margins, LPG boost”. (The Economic Times)
- Improved margins also help companies absorb volatility (inventory losses, crude price swings).
Lesson:
- In integrated downstream oil marketing businesses, both refining and marketing segments matter. A strong marketing margin alone is good; combined with refining margin uplift is very powerful.
- Subsidy/incentive management (e.g., for LPG) remains a key variable — companies managing this well gain competitive advantage.
- Monitoring global refining capacity utilisation, regional cracks/spreads, and domestic policy/subsidy regime gives strategic insight into profitability potential.
Strategic & Industry Commentary
- Profit leverage is increasing: OMCs/ refiners are entering a phase where margins are expected to improve; firms with scale, good cost control and retail network strength stand to benefit disproportionately.
- Policy/regulatory risk remains: Despite margin tailwinds, unresolved subsidy burdens (especially LPG) and pricing regulation can still heavily impact profitability. One needs to watch for government support, deregulation moves.
- Global supply dynamics matter: Refining margins depend on supply‑demand balance, shutdowns/maintenance of refineries, regional cracks. For example, the US refiners expect margin recovery as closures reduce capacity. (argusmedia.com)
- Inventory & crude volatility caution: Even with good margins, sharp crude price moves or inventory accounting losses can erode profits. Range‑bound crude pricing helps stabilise margins.
- Valuation implications: As margin outlook improves, valuations of OMCs could re‑rate. Historically, analysts have used expectation of improved margins & LPG relief to justify positive stance. (The Economic Times)
Key Takeaways
- Marketing margins matter more than ever for downstream oil companies — strong retail fuel margins provide profit cushion.
- Refining margins are improving globally/APAC, and when combined with marketing margin strength, yield substantial profit upside.
- LPG subsidy burden remains a wild card — but margin tailwinds can offset it if managed well.
- For investors/analysts, the second half looks more favourable for OMCs than the first half — margin recovery plus cost/glide path benefits.
- For companies in the sector, focus should be on margin improvement (marketing/refining), cost control, subsidy management, and stabilising retail pricing & inventory risk.
- Here’s a detailed case‑study style breakdown of how strong refining and marketing margins plus LPG incentives are set to boost profits for Oil Marketing Companies (OMCs) in H2 — including commentary and strategic implications.
1. Background & Key Drivers
- Analysts in India expect large OMCs to sustain or improve profitability in the second half (H2) of FY 2025‑26 (and beyond) on the back of robust refining margins, steady marketing margins, and improved LPG under‑recovery compensation from the government. (The Financial Express)
- Refining margins: For example, brokerage reports say product spreads (cracks) for diesel/ATF are ~US$20‑22 / barrel, gasoline ~US$15‑16/bbl; computed gross refining margins (GRMs) are trending >US$9‑10 bbl for Indian OMCs. (The Financial Express)
- Marketing margins: With retail fuel prices (petrol/diesel) remaining steady and crude being relatively range‑bound, marketing margins are expected to remain healthy. (The Economic Times)
- LPG under‑recovery / incentive component: Government compensation for LPG losses and a reduction in per‑cylinder loss (e.g., narrowing from ~₹150 to ~₹100 per cylinder) help reduce the drag on OMC earnings. (The Financial Express)
2. Case Study A: Marketing & Refining Margin Recovery
Facts:
- According to a December 2024 article, OMCs’ refining segment had been weak: for example, Singapore GRM averaged US$3.7/bbl in Q2 FY2025, down from US$9.6 a year earlier. (The Economic Times)
- But signs of improvement emerged: margins were expected to recover in H2 as product cracks improved and oil prices remained range‑bound. (The Economic Times)
- More recently (Nov 3 2025), a brokerage note indicates GRMs at >US$9‑10/bbl plus marketing margins under revision upward for H2FY26. (The Financial Express)
Impacts & Strategic Implications:
- With both refining and marketing margins stronger, OMCs are likely to generate significantly higher EBITDA in H2 compared to H1. The margin leverage means incremental dollar of product spread translates into larger profit.
- Marketing margin stability means retail fuel flows (volumes) remain a profit cushion — given that retail fuel (petrol/diesel) is the largest volume business for OMCs.
- The combination of margin tailwinds (refining + marketing) helps offset lingering burdens (e.g., LPG under‑recoveries).
Lesson:
- For integrated downstream companies, both segments (refining + marketing) matter. A recovery in one without the other limits upside; the “double margin tailwind” is especially powerful.
- Knowing when margins are improving helps time strategic deployment (capex, dividend, share buyback) or valuation re‑rating.
- But one must monitor risk factors: global crude price spikes, inventory losses, supply disruptions which can reverse margin improvements.
3. Case Study B: LPG Incentives and Under‑recovery Mitigation
Facts:
- LPG (liquefied petroleum gas) remains a major drag for OMCs due to under‑recoveries (selling at subsidised price while input cost rises). The December 2024 article estimated an incremental burden of ~₹22,500 crore for H2 in a worst‑case scenario. (The Economic Times)
- The 3 Nov 2025 brokerage note says formal notification for LPG compensation is likely to start Nov 2025 in 12 instalments; e.g., ₹14,500 crore for IOC, ₹7,650 crore for BPCL, ₹660 crore for HPCL. (The Financial Express)
Impacts & Strategic Implications:
- The securing of government compensation/incentives for LPG under‑recoveries reduces one large fixed cost burden — thereby improving net margins.
- Lower per‑cylinder loss (from ~₹150 down to ~₹100) also reduces the drag. (The Financial Express)
- With the LPG headwind easing, companies are more able to translate margin improvements from refining/marketing into profit, rather than it being swallowed by subsidy losses.
Lesson:
- When analysing OMC profitability, don’t ignore the policy/subsidy component — for companies in regulated products (LPG) the government support and under‑recovery impact are material.
- Incentive/compensation announcements can act as catalysts for profit revisals and stock re‑rating.
- Earnings outlooks must factor both operational margin improvements and regulatory compensation or burden changes.
4. Strategic Commentary & Industry View
- The OMC sector in India is entering a more favourable profitability phase: margin tailwinds + subsidy relief. The recent brokerage revisions upward for HPCL/BPCL etc reflect this. (The Financial Express)
- The risks remain: sourcing of crude (especially Russian imports and discount availability), inventory losses if crude/product prices rise unexpectedly, regulatory pricing risk for retail fuels, and continuing LPG burden if government policy shifts. (The Financial Express)
- Valuation implications: With margin improvement and reduced burden, OMCs may be candidates for re‑rating by the market. Analysts have already upgraded EBITDA estimates by ~20‑27% for some firms. (The Financial Express)
- Strategic for the companies: They should leverage the margin tailwinds to, for example, strengthen balance sheet, accelerate growth (retail outlets), or return value to shareholders. But they also must ensure discipline if the margin cycle reverses.
- For investors: Timing is key — margin improvements may already be anticipated; one must evaluate how much is “in the price”, and whether upside from further margin gains and subsidy relief remains.
Key Takeaways
- Double margin tailwind (refining + marketing) is the most powerful driver for OMC profitability improvement in H2.
- Regulatory/subsidy relief (LPG incentives) acts as a crucial enabler for margin gains to reflect in net profit.
- Operational discipline matters: high margins alone do not guarantee profit unless companies manage sourcing, inventory, and cost.
- Sector valuation may lag real improvement: as analysts revise upward, early identification of companies with strongest margin leverage gives opportunity.
- Be mindful of risks: global crude volatility, regulatory changes, supply disruptions could reverse the favourable trend.