Oil PSU Stocks Under Pressure as Iran War Sends Crude Soaring: Value Bet or Value Trap?

India’s oil public sector companies — including IOCL, BPCL, HPCL, ONGC and Oil India — are back in focus as crude oil prices surge amid the ongoing West Asia conflict, raising concerns over fuel supply, margins and stock valuations.

With crude prices rising sharply and volatility returning to global energy markets, investors are questioning whether these stocks offer value — or are potential traps.

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Why oil PSUs matter to India’s economy

India imports over 90% of its crude oil, making energy security a critical concern.

Oil PSUs dominate the sector across the value chain:

• Upstream: ONGC, Oil India (exploration & production)

• Downstream: IOCL, BPCL, HPCL (refining & fuel retail)

• Refiners: MRPL, CPCL

• Midstream: Pipelines and logistics networks

Together, these companies operate:

• 170 million tonnes refining capacity

• 35,000 km pipeline network

• 92,000 fuel stations

• Revenue of nearly $210 billion

Despite this scale, their combined market valuation remains relatively low at around $85 billion, reflecting structural challenges.

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Why these stocks trade at low valuations

Oil PSU stocks typically trade at low price-to-earnings (P/E) multiples due to limited pricing power and government intervention.

Key challenges:

• Crude prices are globally determined

• Government controls fuel prices indirectly

• Windfall taxes and export duties impact profits

• Marketing losses (under-recoveries) hurt OMCs

This results in high earnings volatility, which keeps valuations depressed.

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How rising crude impacts different companies

1. Upstream companies (ONGC, Oil India)

• Benefit from higher crude prices

• Risk of windfall taxes limiting profits

2. Refiners (MRPL, CPCL)

• Depend on Gross Refining Margins (GRMs)

• Margins improve when product prices rise faster than crude

3. Oil Marketing Companies (IOCL, BPCL, HPCL)

• Most vulnerable

• Face under-recoveries if retail fuel prices are not increased

• LPG losses can significantly impact earnings

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Iran war vs Russia-Ukraine war: Key difference

The current crisis is potentially more severe than 2022.

The Strait of Hormuz, through which about 20% of global oil flows, is a major risk factor this time.

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What happened during the last crisis (FY23)

• Crude surged above $120/barrel

• Government imposed windfall tax + export duty

• OMCs faced ₹30,000 crore LPG losses

• Stocks fell sharply:

  • HPCL: -30%

  • BPCL: -17%

  • IOCL: -16%

Meanwhile:

• Refiners and upstream companies rallied

• MRPL and CPCL saw massive gains

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Current situation: Early signs repeating

• Crude has already risen over 40%

• LPG shortages emerging

• Shipping disruptions increasing costs

• OMC stocks have fallen 15–20%

At the same time:

• GRMs are improving

• Demand remains stable

• Government support (₹30,000 crore compensation) is in place

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Key risk: LPG under-recoveries

India imports around 60% of LPG, making it highly sensitive to global prices.

• FY23 losses: ~₹30,000 crore

• FY25 losses: ~₹41,000 crore

If crude stays elevated, OMCs could again face margin pressure.

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What should investors watch?

1. Crude oil trend

Sustained levels above $90–100 could hurt OMCs

2. Government intervention

Fuel price controls and subsidies

3. GRM movement

Critical for refinery profitability

4. Currency (rupee)

Weaker rupee increases import costs

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Valuation insight: P/E vs P/B matters

Traditional P/E ratios can be misleading for oil PSUs.

• P/E rises when profits fall

• Best buying opportunities often occur during high or invalid P/E periods

Instead, Price-to-Book (P/B) is a more reliable indicator:

• Stocks tend to bottom when P/B is low

• Reflects value of physical assets

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Market outlook: Value opportunity or trap?

Oil PSU stocks may appear attractive due to low valuations, but they remain highly cyclical and policy-driven.

• Short-term: Volatility likely

• Medium-term: Dependent on crude and policy

• Long-term: Asset-heavy, strategic importance

Analysts say investors should approach selectively, focusing on valuation levels and macro signals rather than headline P/E ratios.