Excise duty hike on petrol, diesel before Budget 2026? What JM says on HPCL, BPCL, IOC

JM Financial said on Thursday that an excise duty hike of Rs 3 to Rs 4 per litre on auto fuels such as petrol and diesel was “quite likely” ahead of the Union Budget on February 1, as oil marketing companies were earning elevated marketing margins and the central government faced pressure on its fiscal position.

JM Financial said oil marketing companies (OMCs) were earning normalised auto fuel gross marketing margins (GMM) of around Rs 3.50 per litre at a Brent price of about $72 a barrel. At the prevailing spot Brent price of around $61 a barrel, the brokerage said GMMs and integrated margins were significantly higher than normalised levels. It pegged current GMM at about Rs 10.60 per litre versus a historical average of Rs 3.50 per litre, while integrated gross margin was estimated at about Rs 19.20 per litre compared with a historical level of about Rs 12.20 per litre.

On the fiscal side, JM Financial’s economist team said the central government’s FY26 revenue run rate was lagging budgeted estimates. It said revenue receipts during April to November 2025 stood at about 56 per cent of the FY26 budget estimate, compared with 60 per cent in the same period last year, with underlying data indicating a slowdown in tax collections. At the same time, capital expenditure remained strong at Rs 6.58 lakh crore during April to November 2025, or 58.7 per cent of the FY26 budget estimate, versus 46.2 per cent a year earlier.

JM Financial said deflation led lower nominal GDP growth of about 8 per cent for FY26, as per first advance estimates, was likely to exert pressure on meeting the central government’s 4.4 per cent fiscal deficit target for the year. The brokerage added that it expected the government to reduce the fiscal deficit target further to 4 per cent to 4.2 per cent of GDP in FY27.

Against this backdrop, JM Financial said the government had already raised excise duty on cigarettes with effect from February 1, 2026, to boost revenue by about Rs 5,000 crore annually. It said the government could explore multiple avenues to raise revenue ahead of the Budget, including higher dividends from the Reserve Bank of India, higher payouts from public sector undertakings and disinvestment proceeds.

JM Financial said an excise duty hike on auto fuels could be a significant revenue lever. It estimated that a Rs 3 to Rs 4 per litre hike could raise about Rs 50,000 to Rs 70,000 crore on an annualised basis, equivalent to around 0.15 to 0.2 per cent of GDP. It added that every Rs 1 per litre increase in excise duty on auto fuels boosted central government revenue by about Rs 17,000 crore annually.

The brokerage said it believed Brent prices were likely to remain subdued at around $65 a barrel until the November 2026 mid term elections in the US, as Saudi Arabia led OPEC plus continued to maintain a large oversupply of 2 to 3 million barrels per day. It said the government may have deferred an excise duty hike decision earlier while awaiting clarity on where Brent prices stabilised, as Brent near $70 a barrel limited the scope for such a hike.

JM Financial also highlighted the sensitivity of OMC earnings to changes in auto fuel margins. It said every Rs 1 per litre increase or decrease in auto fuel GMM leads to a rise or fall in consolidated Ebitda by 12 to 17 per cent, with the impact estimated at 16.6 per cent for HPCL, 14.5 per cent for BPCL and 12.4 per cent for IOCL. It added that every Rs 1 per litre change in GMM also leads to a 17 per cent to 26 per cent change in valuation for the companies. Alternatively, it said every Rs 1 per litre increase or decrease in GMM above the historical Rs 3.5 per litre level resulted in a rise or fall in OMCs’ book value by 0.2 to 0.5 per cent per month.

JM Financial reiterated a cautious view on OMCs on valuation grounds and due to the risk to sustainability of the current high GMM. “We maintain SELL on HPCL,” the brokerage said, citing its trading at a 10 per cent premium to historical valuations, exposure to the marketing business and risks related to its Rs 73,000 crore Rajasthan refining project, which it said could earn single digit returns on capital employed due to time and cost escalation. It maintained a 'Reduce' rating on IOCL with an unchanged target price of Rs 160 and reiterated a Reduce rating on BPCL with an unchanged target price of Rs 350.