HPCL Q3 Review: Refiner May Be Most Affected By Fuel Price Cut, Say Brokerages

Hindustan Petroleum Corp. will be the most affected among its peers if there is a retail price cut in gasoline and diesel, which cannot be ruled out ahead of the elections, according to brokerages.

Analysts see the possibility of a sharp price cut, the probability of which has dropped amid a modest uptick in refining spreads and lower oil demand, as having an impact on the company's profitability.

The state-run refiner's third-quarter consolidated net profit fell 88% quarter-on-quarter to Rs 712.8 crore after it took a writeback of Rs 7,796.5 crore on crude-oil inventory in the base quarter, according to an exchange filing on Thursday.

While HPCL continues to be a preferred refinery stock for Morgan Stanley, it sees the government's control of fuel prices as a disadvantage in case oil prices spike further.

• Revenue up 15.4% to Rs 1.11 lakh crore.

• Operating profit down 73.8% to Rs 2,160.4 crore.

• Ebitda margin down 666 basis points at 1.94%.

• The board has approved an interim dividend of Rs 15 per share.

• It maintains an 'underperform' rating with a price target of Rs 330 apiece.

• Ebitda was ahead on better marketing profitability, with refining in line.

• As Q3 marketing profitability was ahead with no inventory losses, this raises the possibility of a retail price cut.

• "We see a high likelihood of a retail price reduction in gasoline and diesel given the elevated margins, and we note HPCL will be most adversely impacted among its peers in such a scenario."

• The note also highlighted a slowdown in fuel consumption in November–December.

• It upgrades the return on equity to 15% for the current fiscal on expectations of improved marketing profitability in the fourth quarter, but has left it unchanged for the next fiscal.

• It maintains an 'overweight' with a price target of Rs 555 apiece.

• HPCL core earnings missed estimates "due to the 55-day shutdown of one-fifth of its net refining capacity at the peak of oil prices and hydrocracker maintenance, leading to losses in diesel fuel sales".

• HPCL continues to remain among the "preferred refinery picks in India to play the "golden" age of refining as global fuel shortages remain.

• It sees the upward trend in marketing margins and the improvement in benchmark margin as upward trends. Government control of fuel prices if oil prices spike and lower growth in diesel demand are part of the downside risks.

• It maintains a 'neutral' rating with a price target of Rs 305 apiece.

• Results missed estimates due to lower-than-estimated realised marketing margins and higher operating expenses on account of the plant maintenance shutdown at Vizag refinery for 55 days.

• The company has tied up all crude requirements until the end of the fiscal and mid-April and is not impacted by the recent ongoing Red Sea issues, the company said in a conference call.

• Bottom-upgradation at Vizag will complete construction in the next six–eight weeks, and mechanical completion is expected in the first half of the next fiscal, which will increase distillate yields by over 10%, the brokerage said. It is also said that HPCL Rajasthan Refinery Ltd. will commence production by 2024.

• "The operating environment for the OMC marketing segment remains largely levered to government policies, and while no price cut on auto fuels has been announced yet, we cannot rule it out in the run-up to the elections," Nomura said.

• It also added that with the modest uptick in refining spreads, the margin for sharp price cuts has dropped. If there are any sharp cuts, then it will have an impact on the company's profitability.

Shares of HPCL rose as much as 3.18% during the day to Rs 444.30 apiece on the NSE. It was trading 2.54% higher at Rs 441.95 per share, compared to a 1.20% advance in the benchmark Nifty 50 as of 10:51 a.m.

Twenty out of 34 analysts tracking HPCL have a 'buy' rating on the stock, five recommend a 'hold' and nine suggest a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 87%.