Indian Oil Firms Struggle with Losses Despite Price Hike; IOCL Relatively Resilient

Overview

Nomura released a research report on Indian Oil Marketing Companies (OMCs), noting that despite the government’s announcement of a ₹3/liter retail fuel price increase, this adjustment remains far below current unrecovered costs, resulting in continued losses for OMCs. The report analyzes integrated margins, LPG losses, and valuation levels for IOCL, BPCL, and HPCL, concluding that IOCL—owing to its higher refining exposure and capacity expansion—is best positioned under current conditions.

Core views

Insufficient price adjustment: The government raised retail gasoline and diesel prices by ₹3/liter, but blended unrecovered costs currently stand at approximately ₹28/liter (₹25/liter post-hike), significantly below market expectations. Widening losses: Although the Special Additional Excise Duty (SAED) mechanism has been reinstated to partially offset retail losses, OMCs still face massive losses. Integrated losses are projected at $4/$8/$19 per barrel for IOCL/BPCL/HPCL, respectively—far below pre-war profit levels of $12–14 per barrel. Escalating LPG losses: Blockades in the Strait of Hormuz severely disrupted LPG supply, driving costs from $520/ton pre-war to $1,000/ton. All OMCs are estimated to incur daily LPG losses of approximately ₹4.4 billion. Valuation and stock selection: Despite sharply declining marketing margins, OMC valuations remain above lows seen during the early stages of the Russia-Ukraine war. IOCL, with its high refining exposure and upcoming capacity additions, is viewed as best insulated against current headwinds and receives a Buy rating; HPCL, most affected by marketing losses, is assigned a Neutral rating.

Analysis framework

The report employs a bottom-up methodology, dissecting the contributions of refining and marketing margins to integrated profitability and evaluating the effectiveness of government policies (e.g., SAED mechanism, price hikes) in mitigating losses. It also compares current oil prices and stock performance against those during the Russia-Ukraine conflict to assess whether current valuations are overly optimistic.

Methodology notes

• Valuation MethodSOTP Valuation

  SOTP Valuation

  Sum-of-the-parts (SOTP) valuation involves separately valuing distinct business segments (e.g., refining, marketing, investments) and aggregating them to estimate the total value of a diversified energy company.

• Valuation MethodPB valuation

  PB Valuation

  Price-to-book (P/B) valuation compares current valuations against historical crisis-era lows (e.g., during the Russia-Ukraine war) to assess reasonableness.

• Company Fundamentals & Financial FrameworkEarnings Quality Analysis

  Integrated Margin Analysis

  Analyzes combined refining and marketing margins to evaluate a company’s overall profitability in a high-oil-price environment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Indian Oil Corporation (IOCL IN)

  Relatively Benefited

  Strengths

  High refining exposure, capacity expansion

  Comparison

  Best performer

  Risks

  Refining margins below expectations, rising crude oil prices

• Bharat Petroleum Corporation (BPCL IN)

  Benefited

  Risks

  Refining margins below expectations, LPG losses

• Hindustan Petroleum Corporation (HPCL IN)

  Negatively Impacted

  Weaknesses

  High marketing exposure

  Comparison

  Most affected

  Risks

  Marketing losses, LPG losses, rupee depreciation

Key data

• Fuel Price Hike₹3/literAnnounced by government on May 15
• Unrecovered Costs₹25/literRemains at this level post-hike
• LPG Cost$1,000/tonSignificantly up from pre-war $520/ton
• IOCL Target Price₹190Buy rating
• BPCL Target Price₹460Buy rating
• HPCL Target Price₹440Neutral rating

Impact & implications

The report suggests that if current loss rates persist, HPCL could exhaust its equity capital within 2 years, compared to 10 years for IOCL and 4 years for BPCL. High oil prices may endure over the medium term, and the government may be unable to fully pass on increased costs to end-users to avoid inflationary pressures, implying marketing margins may not recover to pre-war levels anytime soon.

Risks

• Refining margins below expectations
• Sharp rise in crude oil prices
• LPG losses exceeding expectations
• Significant rupee depreciation

What to watch

• Future fuel price adjustments
• Strait of Hormuz developments
• Crude oil price trends