State-run oil refining and marketing company Hindustan Petroleum Corp. Ltd’s (HPCL) June quarter results are nothing to write home about. Net profit of ₹811 crore missed Bloomberg’s consensus estimate of ₹1,002.5 crore.
“Compared to its peer Indian Oil Corp. Ltd that reported strong results last week, HPCL reported a weak set of results," said brokerage firm Nomura Financial Advisory and Securities (India) Pvt. Ltd. “Higher inventory loss was one reason for the miss (IOC had reported inventory gains), but adjusted for inventory loss, both refining and marketing earnings were weaker."
HPCL’s Ebitda of ₹1644 crore too was below forecast. Gross refining margin (GRM) stood at $0.75 per barrel in April-June compared with $7.15 per barrel for the same period last year. GRM is a key measure of profitability for refining companies and refers to the realisation from turning a barrel of crude oil into finished products. Adjusted for inventory loss, HPCL’s core GRM worked out to be $3.3 a barrel. Indian Oil had reported a core GRM of $3.6 per barrel.
HPCL’s marketing margin wasn’t encouraging as well, moderating quite a bit on a sequential basis. “Gross marketing margin, adjusted for inventory losses, came in at $8.9 per barrel (versus $13.8 a barrel in 4Q and our estimate of $9.8 per barrel)," wrote Nomura analysts in a report on 8 August.
Going ahead, investors would do well to follow the trend in the refining environment and whether margins improve. In this context, the extent of gains that play out from the International Maritime Organization’s 2020 rules, which require ships to use fuel oil with lower sulphur content, will be crucial to watch out for. Additionally, whether these companies are able to pass on higher crude oil prices to consumers is worth tracking.
In the past one month, the shares of HPCL have declined by over 10%. Analysts reckon, valuations of the HPCL stock are not demanding. Slower than expected pace of recovery in refining margins is a key risk from investors’ point of view.