Kotak Institutional Equities has upgraded its ratings on Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) to 'reduce' from 'sell', citing a sharp improvement in fuel retail marketing margins.

The brokerage noted that the profitability of petrol and diesel retailing has recovered significantly in recent weeks, driven by lower crude oil prices and improved marketing spreads. The recovery has enhanced earnings visibility for India's major oil marketing companies, which had previously faced pressure from volatile energy markets and compressed retail margins.

According to Kotak, the improvement in fuel marketing economics is expected to support near-term profitability for the three state-owned oil retailers. The brokerage's revised stance reflects a less negative outlook on the sector rather than a fully bullish view, as uncertainties related to crude oil prices, government intervention, and fuel pricing policies continue to remain key risks.

The upgrade comes after a period of significant fluctuations in global crude oil markets, which had impacted the earnings outlook of oil marketing companies. Lower crude prices generally improve marketing margins when retail fuel prices remain relatively stable, allowing OMCs to recover profitability.

While Kotak remains cautious on the long-term risk-reward profile of the sector, it believes the recent recovery in fuel retail profitability has reduced downside risks for IOC, BPCL, and HPCL, leading to the rating revision.