Kotak Institutional Equities has upgraded Indian Oil Corp, Bharat Petroleum, and Hindustan Petroleum to 'reduce' from 'sell', citing recovering fuel marketing margins. While the brokerage forecasts stronger cash flows and expects no losses in FY27, it maintains a cautious stance due to potential government intervention and crude oil price volatility.
What Happened
Kotak Institutional Equities has upgraded its rating for three state-run oil marketing companies (OMCs)—Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL), and Hindustan Petroleum Corp (HPCL)—to 'reduce' from its previous 'sell' rating. This change comes as the brokerage acknowledges a recovery in the profitability of the companies' fuel marketing businesses, which had faced significant pressure earlier this year.
Despite this upgrade, the brokerage continues to maintain a cautious view on the sector. It has provided price targets of ₹150 for IOC, ₹400 for HPCL, and ₹320 for BPCL.
Why The Outlook Is Improving
The upgrade is primarily driven by an improvement in marketing margins—the profit margin the companies earn on every litre of fuel sold at retail pumps. Between March and May, these companies dealt with a squeeze in these margins, which negatively affected their earnings outlook. The recent recovery in these economics has led the brokerage to improve its financial projections for the companies.
Furthermore, Kotak does not anticipate losses for these OMCs in the fiscal year 2027. The brokerage expects earnings to remain stable through FY28 and FY29, provided crude oil prices average around $75 per barrel. The expectation of strong operating cash flows is another positive factor, as it supports the companies' ability to invest in necessary fuel storage infrastructure without adding excessive financial stress.
The Risks That Investors Should Note
While the outlook has improved, the brokerage continues to urge caution. One of the main risks identified is the possibility of government intervention in fuel pricing. For example, the brokerage noted that a rollback of current excise duty benefits, which currently provide significant support to these companies, remains a possibility. Although a complete reversal is considered unlikely, any change in government policy regarding fuel taxes could impact profitability.
Additionally, crude oil price volatility remains a significant factor. The brokerage has adjusted its estimate for the sustainable crude oil breakeven level—the oil price at which these companies can operate profitably—to $85-90 per barrel, up from $75-80 per barrel pre-war. While this gives the companies a larger buffer against sudden price swings, global oil price fluctuations remain a core business risk for these refiners.
What Investors Should Track
The key monitorables for shareholders will be the stability of these marketing margins and any official communication regarding excise duties or retail fuel pricing. Investors may also track how crude oil prices trend, as sustained high prices or extreme volatility can quickly change the financial outlook for these state-run entities. The ability of these companies to maintain their cash flow position, even while continuing to spend on infrastructure, will be a critical measure of their operational health in the coming quarters.