State-run oil marketing companies (OMCs) faced selling pressure on January 20, 2026, with shares falling up to 3% following JPMorgan's downgrade of Hindustan Petroleum Corporation Ltd. (HPCL) to 'Neutral' rating. The brokerage cited valuation constraints and near-term earnings risks as key factors behind the rating cut, affecting investor sentiment across the sector.

JPMorgan's Rating Actions and Rationale

JPMorgan's downgrade of HPCL highlighted several concerns about the company's near-term prospects. The brokerage pointed to limited upside potential due to elevated balance sheet leverage and potential earnings headwinds linked to the commissioning of the new Rajasthan refinery. However, JPMorgan maintained its 'Overweight' stance on both Bharat Petroleum Corporation Ltd. (BPCL) and Indian Oil Corporation Ltd. (IOCL) within the sector.

Strong Historical Performance Faces Headwinds

The three major OMC stocks have delivered impressive returns over the past 12 months, rising between 23% and 30%, significantly outperforming the Nifty index which gained approximately 10% over the same period. This rally has been largely driven by strong earnings upgrades across the sector.

Excise Duty Uncertainty Creates FY27 Earnings Risk

JPMorgan identified excise duty policy as a critical factor for future earnings revisions. The brokerage noted that while some further upgrades to near-term earnings for FY26 remain possible, revisions to FY27 estimates will be crucial to sustain further upside. FY27 earnings for OMCs could face downside risk if fuel taxes are raised by ₹2.00 per litre, while estimates could move higher if such an increase does not materialise.

The brokerage highlighted that central government revenue collections have been tracking below budget, increasing the possibility of additional fund mobilisation through higher excise duties. A ₹2.00 per litre increase in excise duty on petrol and diesel could generate approximately ₹34,000.00 crore, or $3.80 billion, in additional revenue for the government.

Market Impact and Future Outlook

JPMorgan believes further upside in OMC stocks now depends on either a sharp and sustained decline in crude oil prices or clear visibility on excise duty policy. The brokerage estimates that a $1.00 per barrel change in average FY27 crude oil prices could impact OMC EBITDA by around 7.00%.

The brokerage noted that such excise duty increases need not necessarily be announced in the Union Budget on February 1, 2026, as fuel taxes were last raised on April 8, 2025. With clarity on taxes unlikely in the near term, the recent rally in OMC shares may pause until there is definitive confirmation regarding excise duty policy, potentially only becoming clear if taxes remain unchanged several months into FY27.

Hindustan Petroleum Corporation Limited has announced a strategic partnership with the United Arab Emirates' Abu Dhabi National Oil Company (ADNOC) for a comprehensive liquefied natural gas supply agreement. This collaboration marks a significant development in India's energy sector and strengthens the bilateral energy relationship between the two nations.

Partnership Details

The agreement establishes a long-term supply arrangement that will commence operations in 2028. This partnership represents HPCL's commitment to diversifying its energy portfolio and securing reliable supply sources for its operations.

Strategic Significance

This collaboration between HPCL and ADNOC demonstrates the strengthening energy ties between India and the UAE. The agreement positions HPCL to enhance its natural gas supply capabilities and supports the company's long-term strategic objectives in the energy sector.

The partnership with ADNOC, one of the world's leading energy companies, provides HPCL with access to reliable LNG supplies from the UAE. This arrangement is expected to contribute to India's energy security objectives and support the country's growing natural gas requirements.

Future Implementation

The 10-year agreement will begin implementation in 2028, providing both companies with a structured framework for long-term cooperation. This timeline allows for proper planning and preparation to ensure smooth execution of the supply arrangement when it becomes operational.