Investors seem to be excited about core gross refining margin. HT
Investors seem to be excited about core gross refining margin. HT

Why investors cheered despite the sharp drop in HPCL’s profit

  • For a refiner, GRM is the realization from turning every barrel of crude oil into finished products
  • The relatively small profit of 248 crore, it turns out, was far better than the Street’s estimate of a small loss

Hindustan Petroleum Corp. Ltd (HPCL) reported an 87% drop in its net profit for the December quarter, which the markets welcomed by sending its shares up 4%. What’s going on? The relatively small profit of 248 crore, it turns out, was far better than the Street’s estimate of a small loss.

Note also that the profit for the last quarter was hit on account of inventory losses totalling about 3,500 crore for its refining and marketing segments.

Investors seem to be excited about core gross refining margin (GRM), which came in at $10 a barrel, far better than analysts’ expectations. For perspective: HPCL’s reported GRM for the December quarter was at a low of $3.7 a barrel. The difference between core and reported GRM can be attributed to inventory loss of the segment.

For a refiner, GRM is the realization from turning every barrel of crude oil into finished products.

According to analysts at Emkay Global Financial Services Ltd, HPCL’s December quarter core GRM was driven by a price lag impact and lower “fuel & loss" costs. Fuel and loss refers to the cost that refineries incur due to fuel consumed to run the refineries and the fuel lost in the system while processing crude oil into petroleum products.


Of course, going ahead, investors will watch the GRM performance closely. The refining environment isn’t encouraging, with benchmark Singapore GRM at about $2 a barrel, down from an average of $4.3 a barrel during the December quarter.

“We believe near term operational scenario remains muted with weakness in GRMs to persist and high capex to increase leverage for HPCL," wrote analysts from IDFC Securities Ltd in a report on 5 February. International Maritime Organization regulations may provide a boost to GRMs in FY21, but in the near term earnings visibility is poor, exacerbated by the forthcoming elections, said IDFC. In an election year, investors worry the company may not be able to pass on higher crude oil prices to consumers.

These factors are likely to keep meaningful upsides in the share price at bay from a near-term perspective, despite undemanding valuations. So far in FY19, the HPCL stock has dropped by 32%

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