What should investors do with HPCL, BPCL, IOC shares? Here are two recommendations

Shares of oil marketing companies (OMCs) could remain in focus after brokerages turned more constructive on the sector, citing a sharp correction in crude oil prices and improving marketing margins.

In a sector note, Kotak Institutional Equities said the outlook for OMCs has improved after the margin squeeze witnessed between March and May. The brokerage said that earlier increases in petrol and diesel prices had raised the sector's breakeven crude price to around $102-105 per barrel, which was still insufficient at the time.

However, with crude prices having corrected by more than 30%, integrated refining and marketing margins have rebounded sharply.

Kotak expects some rollback of the benefit through higher excise duties, but believes a complete reversal of the ₹17.5 per litre gain - comprising both excise duty cuts and fuel price hikes - is unlikely.

The brokerage now expects the breakeven crude price to settle at a higher range of $85-90 per barrel, compared with the pre-war level of $75-80 per barrel. As a result, it does not expect OMCs to report losses in FY27.

Assuming crude averages around $75 per barrel, Kotak expects strong earnings in FY28 and FY29, which could provide a buffer for future capital expenditure, including investments in storage infrastructure.

The brokerage upgraded its ratings on Bharat Petroleum Corporation Ltd. (BPCL), Hindustan Petroleum Corporation Ltd. (HPCL), and Indian Oil Corporation Ltd. (IOC) to 'Reduce' from 'Sell', while setting target prices of ₹320, ₹400, and ₹150, respectively.

JPMorgan also said that composite margins on petrol and diesel are now above pre-war levels. While LPG losses remain elevated, the brokerage expects them to ease as oil prices decline further.

It cautioned, however, that Q1FY27 earnings are likely to be impacted by inventory losses arising from the sharp fall in crude prices, although profitability should improve in the second quarter.

According to JPMorgan, two factors temper the near-term optimism. First, OMCs have likely accumulated substantial debt over recent months, which could weigh on valuations. Second, a significant portion of the recovery in profitability is linked to lower excise duties, raising the possibility that the government may eventually increase taxes again.

The brokerage said it is difficult to form a clear view on FY28 margins because of this uncertainty.

JPMorgan added that HPCL, BPCL, and IOC are likely to remain tactical plays in the near term, with their performance closely tied to further easing in oil prices. Among the three, the brokerage prefers BPCL and IOC.

On Friday, HPCL shares closed 2.20% lower at ₹392.75, BPCL declined 2.97% to ₹306.90, and IOC fell 1.73% to ₹143.58.

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