HPCL and Mahanagar Gas stand out as top picks in a mixed oil & gas landscape; Motilal sees 17-28% upside
A combination of favorable crude oil dynamics, stable pricing policies, and volume growth underpins the positive outlook for marketing and CGD segments. However, a glut in global refining capacity and muted demand projections cast a shadow over refining profitability.
Marketing remains the preferred sub-sector, driven by expectations of lower crude oil prices (FY26E: $65/bbl) and stable retail fuel prices. Despite a recent INR2/litre excise duty hike on petrol (MS) and diesel (HSD), marketing margins remain robust at ~INR12/litre, well above our long-term assumption of INR3.3/litre.
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This resilience, coupled with a healthy 4% annual volume growth, supports earnings visibility for
oil marketing companies
(OMCs). Private players are capitalizing on strong margins, with their combined diesel and petrol sales surging 19.7% YoY in FY25, outpacing state-run firms.
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While competition intensifies, the sector's earnings face limited near-term risks, with potential upside if crude stays subdued.
After maintaining a neutral stance since November 2023, the CGD segment is now turning attractive. Falling raw material costs, driven by a looming global LNG surplus and lower gas pricing slopes, are expected to boost margins.
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Additionally, rising CNG adoption—supported by favorable economics vs. traditional fuels—is likely to sustain volume growth. With compressed natural gas (CNG) demand projected to grow at a steady clip, CGD companies stand to benefit from both margin expansion and volume tailwinds, marking a notable shift in sector sentiment.
The refining segment faces challenges as global net capacity additions (0.4/0.95 mb/d in CY25/26) outpace demand, worsened by the International Energy Agency's (IEA) 300 kb/d downgrade to CY25 oil demand growth.
While Brent prices are forecast at $65/bbl in FY26/27, downside risks persist, potentially denting profitability for upstream players like
ONGC
and
Oil India
. Though these firms trade at cheap valuations (0.8x–1.1x FY27E book value), weak realization trends justify caution.
The sector's near-term fortunes hinge on crude oil trends and policy decisions. While marketing and CGD segments offer growth and margin resilience, refining and upstream activities face structural headwinds.
Investors may prioritize OMCs and CGD players, leveraging their earnings stability, while adopting a selective approach in a volatile macro environment. Risks such as sharper-than-expected crude price declines or policy shifts warrant monitoring, but the current setup favors downstream and gas-focused segments.
HPCL: Buy| Target Rs 455| LTP Rs 387| Upside 17%
Hindustan Petroleum reported EBITDA 61% above estimates, driven by stronger-than-expected GRM of USD8.5/bbl. & marketing margin of INR4.5/lit, leading to PAT of INR33.5b, (+114% beat). We model a marketing margin of INR 3.3/litre for both MS and HSD in FY26/27, while the current marketing margins for MS and HSD are both above INR 10/litre.
We identify several key catalysts for the stock going forward: (1) the de-merger and potential listing of its lubricant business, (2) the commissioning of its bottom upgrade unit in 2QCY26, (3) the start of its Rajasthan refinery in FY26, and (4) LPG under-recovery compensation.
Mahanagar Gas Ltd: Buy| Target Rs 1760| LTP Rs 1368| Upside 28%
Mahanagar Gas
(MAHGL)'s adjusted EBITDA margin stood at INR 8.35/scm, below our estimate of INR 10/scm (reported EBITDA: INR 10/scm). During the quarter, MAHGL added 0.15 million domestic connections and 164 industrial/commercial customers, taking the total to 5,105.
We believe MAHGL's EBITDA margin has scope for further improvement, supported by two key factors: (1) the recent CNG price hike of INR 1.5/kg and D-PNG price hike of INR 1/scm, which will aid margins, & (2) declining raw material costs in 1QFY26-to-date.
The fall in crude oil & Henry Hub index prices, along with INR appreciation on a QoQ basis, should help lower gas procurement costs going forward. We expect a 10% CAGR in volume over FY25-27.
(
Disclaimer
: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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