Rising domestic demand for refined petroleum products such as petrol and diesel on the back of an expanding economy is expected to off-set the compressed gross refinery margins (GRMs) of oil marketing companies in FY26.

India Ratings and Research (Ind-Ra) expects GRMs to remain subdued during FY26, similar to H1 FY25, on account of slowing global consumer and industrial demand, particularly in China.

Besides, additional supply flowing from refinery capacity additions seen globally is also putting pressure on margins, it opined.

However, demand for petroleum products in India is expected to remain strong during FY26, with bulk demand coming from diesel, petrol and LPG. EBITDA for Indian integrated OMCs was supported by healthy marketing margins during H1 FY25 on account of declining crude oil prices, subdued crack spreads and stable retail prices, the ratings agency said.

“Indian oil and gas demand is expected to remain strong in FY26, leading to an expansion in the refinery and petrochemical capacities.

India’s refinery capacity is expected to increase by 22 per cent in the next two-three years.

Ind-Ra expects strong demand to be driving oil and gas investments decisions in India”, said Bhanu Patni, Associate Director (Corporates) at Ind-Ra.

Maintaining a neutral outlook on the oil and gas sector for FY26, Ind-Ra expects credit profile of downstream companies to remain stable during the year.

Credit profile may see an addition of debt on account of under construction refinery expansion projects for all the major OMCs.

The credit profile of upstream oil companies shall remain dependent on crude oil prices.

EBITDA generation for upstream companies may fall with a moderation in oil prices and a reduction in production from legacy fields.

However, the impact of low crude oil price is expected to be offset by the removal of special excise on the production of crude and an increase in production expected from new discoveries.

Upstream companies will continue to earn healthy margins, despite the current decline in crude oil prices, as they would remain above $65 per barrel, Ind-Ra said.

This would keep sufficient cushion in margin, with estimated break-even cost of production at $40-45 per barrel, leaving EBITDA of $20-30, it added.

Oil prices averaged $78.7 a barrel during Q2 FY25 and declined to $75.2 during October 2024 and $73.02 during November 2024.

“Crude prices will remain dependent on global geopolitical developments, including demand pickup and production targets announced by the OPEC+. However, for domestic producers, Ind-Ra expects some relief from the impact of decline in oil prices on account of the removal of windfall profit tax on crude,” it opined.

The government had announced a reduction in the overall share of domestic gas allocation to city gas distribution (CGD) companies.

The demand increase in the segment coupled with declining production of administered price mechanism (APM) gas has led to the decline in priority allocation of APM gas to the CGD sector especially for CNG.

“Ind-Ra opines the reduced allocation will expose the players in the sector to the risk of managing long-term supply contracts.

CGD companies on a blended basis earn an EBITDA margin of Rs 7-10 per standard cubic metre (scm), which could reduce by Rs 3-4 per scm depending on their volume mix post the reduction in allocation of domestic gas for CGD sector,” it said.

Given the sector benefits from a net negative working capital cycle and accelerated debt reduction post the initial few years of operations of a geographical area, Ind-Ra expects the sector’s credit profile to remain stable in FY26.

The return on invested capital could moderate in FY26, however it would remain healthy.

New geographical areas could see some pressure on capex execution as the internal accruals for funding capex may come down, the agency anticipated.

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