Indian Oil Shares Under Pressure: Nuvama Predicts 66% Margin Drop
Indian Oil Corporation (IOCL) stock faces renewed selling as Nuvama Institutional Equities flags a risky outlook for refining margins and profits over the coming months. Although certain business lines showed decent growth, the brokerage has stuck with a ‘Reduce’ stance, noting short-term factors that could weigh on earnings and investor returns.
**1. Refining Margins Take a Dive**
IOCL’s Q1 FY26 gross refining margins (GRMs) tumbled 66% from a year ago, landing at $2.15 per barrel, Nuvama reports. That result trails Bharat Petroleum (BPCL) at $4.90 and Hindustan Petroleum (HPCL) at $3.10, underscoring a weak quarter for Indian Oil’s refining segment.
Inventory losses of $4.80 per barrel drove the sharp drop, Nuvama says, even as IOCL upped its Russian crude mix from 14% in Q4 to 24% in Q1. While the higher Russian crude share cut input costs, it failed to cushion the overall pressure on refining profits.
Nuvama says weak refining margins and high crude prices are a tough near-term test for Indian Oil. Investors should tread carefully because the below-target gross refining margins could keep hurting profits for the next few quarters.
Nuvama flags Indian Oil’s big spend plans as another red flag. The firm plans to invest ₹33,500 crore for FY26 to lift refining capacity, expand petrochem operations, and push new energy projects. These moves are smart for the long haul, but they can push debt up and reduce return ratios.
Heavy upfront costs, especially when margins are soft, can drag down return on capital employed. That makes the investment case for the stock less appealing. Nuvama warns that the tough margin environment and ongoing capex could keep IOCL shares on the back foot for the coming months.
## EBITDA and Net Profit Miss Estimates
IOCL’s Q1FY26 results showed strong year-on-year growth, but still fell below Nuvama’s numbers. The company posted:
– **EBITDA**: ₹12,600 crore, up 46% YoY
– **Net Profit**: ₹5,700 crore, more than double YoY
The shortfall came mainly from weaker refining and petrochemical results, plus inventory losses, which countered the boost from strong marketing margins.
LPG under-recoveries jumped sharply to ₹23,600 crore in Q1, up from ₹3,700 crore last year. Although IOCL increased market share against BPCL and HPCL, the higher under-recoveries add fiscal pressure and underline the company’s dependence on government reimbursements.
Nuvama observes:
“IOCL’s peak earnings are likely behind it, given the weak near-term refining margins, rising LPG under-recoveries, and a sluggish petrochemical segment. Furthermore, a high capex cycle will likely keep return ratios under pressure, making the risk-reward unattractive.”
## Share Performance and Outlook
IOCL’s share movement has been uneven:
– 6% drop in the last month
– 16% rise in six months
– 17% drop over the past year
– 3.6% gain year-to-date
These shifts reveal ongoing market concern over refining margins, capex plans, and outside factors like crude price swings and possible policy changes.
Given the current macro and company-specific risks, investors should prepare for more decline, particularly if refining margins stay weak and heavy capital spending continues to squeeze returns.
**Key Takeaways**
**Margin Pressure**: Gross refining margins dropped 66% year-over-year in Q1 FY26, falling behind industry peers. Inventory write-downs and sluggish petrochemicals prices heighten the risk.
**High Capex**: A projected Rs 33,500 crore capital outlay could drive debt higher and pull down return on capital employed, hurting short-term profitability.
**Earnings Miss**: Both EBITDA and net profit disappointed market forecasts, even with year-over-year increases; continuing LPG subsidy shortfalls worsen the strain.
**Nuvama’s Target**: Rs 130 per share, valuing the stock with a 7% downside from the current price.
**Investor Takeaway**: Although IOCL retains a leading position in India’s energy market, the immediate outlook is clouded by margin compression, a costly capital cycle, and the risk from policy-driven under-recoveries. Careful watchers should limit added exposure and wait for updated quarterly figures and sector news before deploying more capital.
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