BPCL, HPCL, IOC: HSBC retains 'Buy, raises targets on 2 OMC stocks; here's why

HSBC has reaffirmed its 'Buy' ratings for major oil marketing companies (OMCs) Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), and Indian Oil Corporation Limited (IOC). The brokerage has raised the target prices for HPCL and IOC, attributing the decision to anticipated strong earnings driven by lower oil prices and a reduction in LPG losses.

According to HSBC, the first quarter of fiscal year 2026 saw stronger-than-expected marketing margins, which were offset by higher inventory losses. Despite these losses, the brokerage remains optimistic about the OMCs' earnings potential, driven by lower crude oil prices and robust marketing margins. HSBC noted, "We increase marketing margin estimates given low crude oil prices leading to higher earnings. We raise our target prices based on FY27e book values as we also roll forward our valuation period to September'25 from June'25, which results in HPCL target price increasing to Rs 520 from Rs 490) and IOCL target price increasing to Rs 190 from Rs 180."

HSBC's analysis also highlights a decrease in LPG losses, which reportedly fell by 30-40% per cylinder compared to the first quarter of the previous fiscal year. These reductions, along with stable auto fuel marketing margins, are expected to bolster the fiscal year 2026 earnings. The firm anticipates minimal shocks from inventory losses, given that such losses have already been accounted for, and Brent crude oil prices remain stable at $65-67 per barrel.

The brokerage underscores the significance of product cracks and refining margins in the profitability of OMCs. "GRMs continue to trend lower than long-term averages, but product cracks remain healthy and higher than FY25. This indicates refining profitability could be better than last year if Russian crude mix does not alter too much. With inventory losses already booked in 1QFY26, and Brent prices $65-67/barrel (largely in line with HSBC forecasts for FY26), with stable oil prices, shocks from inventory losses are less likely," HSBC stated.

The firm's note added that lower oil prices would also reduce working capital requirements for OMCs, thereby decreasing their borrowing needs. This financial flexibility is expected to support ongoing large capex plans, offering a safety margin against potential earnings volatility.

Despite the optimism, the first quarter earnings of fiscal year 2026 were lower than estimated, primarily due to higher inventory losses. However, there was a notable improvement in marketing margins. On a quarter-on-quarter basis, HPCL and BPCL reported profit after tax (PAT) increases of 30% and 90%, respectively, whereas IOC saw a decline of 20% due to inventory impacts.

A potential challenge lies in the competition from private refiners, who have begun capturing some market share, particularly in diesel and petrol segments. This trend warrants attention as it may influence the competitive dynamics within the industry.