The Government of India (GoI) has approved ₹30,000 crore in compensation to the three public sector oil marketing companies (IOCL, BPCL, and HPCL) for LPG under-recoveries. This support will help them meet critical requirements such as crude and LPG procurement, debt servicing, and sustaining capital expenditure.
The amount will be paid in 12 tranches, though the government has not clarified the timeframe for disbursement. International LPG prices remained elevated during 2024–25 and continue to be high.
However, to shield consumers from fluctuations in global LPG prices, the increased costs were not passed on to domestic LPG users, resulting in significant losses for the three OMCs. Despite these losses, the companies ensured continuous domestic LPG supplies at affordable prices.
Significantly positive for OMCs as ₹30,000 crore compensation exceeds expectation
According to domestic brokerage firm, JM Financial, the approved LPG compensation is a significant positive for OMCs, as it exceeds the consensus expectation of ₹10,000–15,000 crore.
The brokerage noted that OMCs earned ₹25,000–30,000 crore in additional auto-fuel marketing margins in FY25, with auto-fuel marketing margins averaging ₹6.5 per liter (versus the historical ₹3.5 per liter) and integrated auto-fuel marketing margins at ₹14.1 per liter (versus the historical ₹12.1 per liter), even after accounting for lower GRMs.
JM Financials’ calculations suggest the ₹30,000 crore compensation is likely to be distributed as ₹14,500 crore to IOCL (equivalent to 7.3% of its current market cap), ₹7,900 crore to HPCL (equivalent to 9.1% of its current market cap), and ₹7,600 crore to BPCL (equivalent to 5.5% of its current market cap).
Although there is still a lack of clarity on whether the ₹30,000 crore compensation is solely to cover FY25 LPG under-recoveries or also intended to address potential FY26 under-recoveries. JM Financial believes it is largely to compensate for FY25 under-recoveries of ₹41,300 crore but could also partly cover the estimated ₹20,600 crore under-recoveries for FY26.
Based on HPCL’s Q1FY26 results, LPG under-recoveries in Q1 FY26 alone are likely around ₹8,600 crore, with the full-year estimate assuming current low global LPG prices and unchanged domestic prices. Earlier, in October 2022, the GoI had announced ₹22,000 crore in compensation to OMCs for LPG under-recoveries of ₹28,300 crore incurred between June 2020 and June 2022.
Upgrades IOCL to ‘Hold’
JM Financial has upgraded its rating on Indian Oil Corporation to hold from sell, with a revised price target of ₹135, citing reasonable valuations, as the stock is trading at 0.9x FY27 price-to-book (in line with its historical average) after the recent correction, and expects strong earnings growth over FY27–FY28, driven by an 18 mmtpa (25%) refining capacity expansion in the next 12 months.
It maintained its hold rating on BPCL, noting that the stock is still trading at a significant premium to its historical multiple of 1.2x, currently at 1.3x FY27 price-to-book value. However, the company’s aggressive capital expenditure plan of ₹1,500 billion over five years prevents JM Financial from taking a more constructive view.
The brokerage reiterated its sell rating on HPCL, citing the stock’s significant premium to historical valuations and concerns that its massive ₹730 billion Rajasthan refining project may deliver only single-digit RoCE due to considerable time and cost overruns.
JM Financial further believes that OMCs’ integrated refining-cum-marketing margins will normalise to historical levels, as the government may retain the benefit of any sustained crude price decline through excise duty hikes and/or fuel price cuts.
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