Whalesbook
Crude Price Forecast Hiked
Emkay Global has sharply raised its Brent crude price forecast for FY27 to $86 per barrel, up from $70. This change reflects ongoing geopolitical instability in West Asia. Spot prices have surged, averaging $104/barrel in March and $124/barrel so far in April, with prices swinging wildly between $99 and $145 per barrel.
Margins Under Fire
High crude costs are directly squeezing auto fuel marketing margins for these companies. This pressure is amplified because retail prices in a regulated environment often lag behind increases in input costs. Simultaneously, refining profits, tracked by gross refining margins (GRMs), are also facing pressure from government actions.
Windfall Tax Impact
Government windfall taxes on diesel and aviation fuel cap refiners' gains. Emkay estimates these taxes target around $20 per barrel in net crack margins. However, with falling benchmark prices, actual net crack margins have turned negative, ranging from $20-$30 per barrel since April 11, severely impacting profitability even when headline GRMs appear positive.
Profit Forecasts Slashed
Emkay Global foresees a significant hit to earnings, especially in the first quarter of FY27. The firm projects a combined loss of ₹37,000-38,000 crore for the three state-owned oil companies. This is due to negative marketing margins, unpredictable refining margins, and continued under-recoveries on Liquefied Petroleum Gas (LPG). For the full fiscal year 2027, Emkay expects earnings before interest, taxes, depreciation, and amortization (EBITDA) to drop by about 40% for IOCL and BPCL, and by a sharp 60% for HPCL.
Ratings and Price Targets Cut
Following this outlook, Emkay has downgraded IOCL, BPCL, and HPCL from 'Buy' to 'Add'. Target prices were reduced by 20-25%, with new targets set at ₹160 for IOCL, ₹350 for BPCL, and ₹410 for HPCL. The firm values IOCL and HPCL at 6 times enterprise value to EBITDA (EV/EBITDA) and BPCL at 5.7 times. While earnings might improve if crude prices drop below $90 per barrel from the second quarter, the current sharp decline presents a major risk to the full-year financial performance, closely linked to geopolitical events in West Asia.