Mumbai: State-run oil marketing and refining firm, Hindustan Petroleum Corp Ltd’s (HPCL) September quarter earnings fell short of Street expectations. The company’s standalone net profit of 1,052 crore was lower than analysts’ estimates, as performance from the refining segment remained lacklustre. This comes at a time when the company posted refining inventory gains, contrary to the general expectation of an inventory loss for the quarter.

“HPCL’s reported and core gross refining margins (GRMs) stood at $2.83/ $2.55 per barrel, below our $5.5-6 expectation, but a trend similar to Indian Oil Corp. Ltd (IOCL)," Emkay Global Financial Services Ltd said in a report today.

GRM is the realization from turning a barrel of crude oil into finished products and is a key measure of profitability for refiners.

“Core Ebitda was weak too on soft refining while debt rose to five-year highs on higher capex and working capital," point out analysts from Jefferies India Pvt Ltd. Ebitda is earnings before interest, tax, depreciation and amortisation.

Meanwhile, HPCL’s marketing segment performed well on the back of better auto fuel margins. “Marketing margins improved 16% qoq to 5.7/kg, a 4% beat and better than peers," according to Emkay.

Overall, on a consolidated basis too, HPCL’s September quarter performance doesn’t bring cheer thanks to loss from its joint ventures and associates.

What next?

In general, potential privatisation of peer, BPCL, can be expected to lead to a rerating of shares of state-run oil marketing companies. But there are specific concerns. Looking ahead, HPCL’s earnings could recover helped by the benign outlook for oil prices and auto fuel margins, although likely not much as for its peers IOCL and Bharat Petroleum Corp. Ltd (BPCL), point out Jefferies analysts. “HPCL's lower share of diesel (~46% vs. ~52%) and higher share of fuel oil (~10% vs ~4%), leaves it less likely to benefit from the IMO uptick," added the broker.

Investors should watch the extent of gain in refining margins hereon. So far this financial year till 7 November, the HPCL stock has increased 9%.

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