While Nomura maintained buy ratings on Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOCL) as well, it said BPCL offers the best combination of operational strength and valuation comfort.
“We prefer BPCL due to its balanced exposure to both refining and marketing, superior refinery operating metrics compared to its peers, and a reasonably high marketing footprint,” the brokerage said.
Operational strength sets BPCL apart
BPCL leads the pack in refining performance, a key driver behind Nomura’s bullish view. Over the past five years, BPCL has recorded an average refinery utilisation of 106%, outpacing HPCL and IOCL, which operated between 96–99%. It also reported the highest distillate yield, at around 84%, compared to 73–77% for its peers.
“BPCL has consistently reported the highest GRM among its peers over the past five years,” Nomura noted, forecasting the company’s gross refining margin to improve to $8.4 per barrel in FY26 from $6.8 in FY25. The company is also expected to benefit the most from recovering margins, given its diesel-heavy product slate and the continuing, albeit narrowing, advantage from discounted Russian crude.
In contrast, IOCL and HPCL face greater exposure to the refining cycle through ongoing or upcoming capacity additions, some of which may struggle to generate sufficient returns in the current macro environment.
Marketing margins remain elevated but vulnerable
All three OMCs are currently benefiting from historically high marketing margins, with blended auto fuel margins at about Rs 11 per litre in 1QFY26, compared to a five-year average of Rs 3.2. These strong spreads have persisted despite a Rs 2 per litre excise duty hike by the government in April.
However, Nomura expects margins to normalise. “With a ceasefire between Iran and Israel already in place, we believe that much of the volatility in the crude oil market is behind, and the government may be looking to readjust the margins earned by OMCs either via excise duty hikes or some cut in fuel prices, or a combination of both,” the brokerage said.
Still, even on a moderated estimate of Rs 6 per litre for FY26–28, Nomura expects marketing margins to remain well above historical averages and continue supporting the companies’ capital expenditure plans.
BPCL’s capex plan more balanced; IOCL, HPCL face challenges
BPCL’s expansion efforts include a Rs 450 billion project at its Bina refinery and a Rs 120 billion upgrade at Mumbai, alongside petchem ventures in Kochi and Bina. Nomura views this as a manageable and strategically timed investment cycle, aligned with the company’s operating strengths.
By contrast, IOCL’s capex is more aggressive and heavily skewed toward petrochemicals, where market conditions remain weak. The company is adding about 17mtpa of refining capacity, 24% of its current base, but Nomura expects low free cash flow generation over FY26–28 due to this intensive investment phase. “With petchem currently in a down-cycle, we do not expect any meaningful earnings contribution in the near-to-medium term,” the brokerage said.
HPCL, meanwhile, has delivered the best share price performance, up 49% in four months versus BPCL’s 40% and IOCL’s 30%. But Nomura warned this leaves HPCL more exposed to any drop in marketing margins. It also flagged risks related to the Barmer integrated refinery and petrochemical complex, which is set to begin operations in 2QFY26 after significant delays and cost overruns. “We estimate that the project might just break-even at an integrated margin of USD 16/bbl, which is unlikely to be realised in the current market conditions,” Nomura said.
Valuation still favourable for BPCL
Despite recent stock gains, Nomura sees valuation comfort in BPCL. The stock trades at 1.5x one-year forward price-to-book, about 15% discount to its historical average, and at 9.3x forward earnings, in line with its long-term average. The target price of Rs 435 is based on a sum-of-the-parts valuation, ascribing a 6.5x multiple to its FY27 EBITDA for both refining and marketing businesses.
Key risks for BPCL include a sharper-than-expected fall in marketing margins, weaker GRMs, and execution challenges in its ongoing projects. Nonetheless, Nomura believes the company remains the best-positioned among public-sector OMCs.
“With balanced exposure, strong refining metrics, and room for valuation re-rating, BPCL offers the most compelling investment case in the sector,” the brokerage said.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
