Shares of Hindustan Petroleum Corporation Limited (HPCL) tumbled nearly 5% in early deals on Friday after the state-owned company reported weak performance in the September quarter (Q2 FY23). The oil marketing company’s second quarter earnings were impacted by drop in gross refining margins (GRMs) and continuing losses in marketing due to a freeze on retail prices of petrol and diesel.

Reacting to Q2 earnings, HPCL share price opened 1.9% lower at ₹207, against the previous closing price of ₹211.05 on the BSE. Extending opening losses, the stock fell 4.5% to hit a low of ₹201.05, while market capitalistion dropped to ₹28,676 crore. By 11:30 am, 1.7 lakh shares changed hands over the counter on the BSE, as against the two-week average volume of 1.8 lakh scrips.

The oil stock trades close to its 52-week low of ₹200 touched on October 20, 2022. It hit a 52-week high of ₹354.55 on November 15, 2021. In the last one year, the stock has fallen 37%, while it lost 32% in the calendar year 2022. HPCL has underperformed the benchmark index by falling 25.5% in the last six months, compared to a 9% rise in the Sensex during this period. In the last one month, the counter has shed 7.5%, while it dropped nearly 5% in a week.

For the July-September quarter (Q2FY23), HPCL reported consolidated net loss of ₹2,475.69 crore, compared to profit of ₹1,918.89 crore in the same period last year. On the quarter-on-quarter (QoQ), the loss narrowed from ₹8,557.12 crore in Q1FY23. The second quarter earnings were aided by around ₹5,600 crore of accrued LPG subsidy which was paid by the central government during the quarter under review.

This is for the first time that HPCL posted a back-to-back quarterly loss amid a continued decline in margins due to the freezing of retail fuel prices.

However, consolidated total income increased to ₹114,497.65 crore in Q2FY23, from ₹88,299.19 crore in Q2FY22. On a sequential basis, the income dropped from ₹121829.51 crore in the June quarter of the current fiscal.

Meanwhile, the average Grass Refining Margin (GRM) for the period April-September 2022 stood at $12.62 per barrel as against $2.87/bbl in the year-ago period. This is before factoring the impact of special additional excise duty, the company said.

Should you buy the dip?

Considering high crude price volatility, HPCL shares have received mixed reviews from brokerage houses post its September quarter earnings. As many as 7 analysts have given long term price targets for HPCL. The average target price is ₹253.57, an upside of 24.7% from Thursday’s closing price of ₹203.35, as per Trendlyne data.

ICICI Securities assigns “REDUCE” rating

Domestic brokerage house ICICI Securities said that HPCL’s Q2FY23 operating performance was weaker-than-expected, with a recurring EBITDA loss of ₹7,120 crore and net loss of ₹7,790 crore against its estimates of ₹7,130 crore and ₹8,080 crore, respectively.

“FY23E prospects appear muted despite the forecast of double-digit GRMs, given negligible marketing earnings to offset this advantage. FY24E is likely to see a sharper recovery, with around 3x increase in refining throughput, thanks to the commissioning of ~7mtpa Vizag refinery, 4-5mtpa Rajasthan refinery (50% share), and the expected MRPL merger (~12mtpa) apart from some revival in marketing margin,” it said in a report.

The brokerage remains cautious on the stock due to the sharp increase in leverage and decline in return ratios and reiterated the “REDUCE” rating with a target price of ₹186 per share.

Prabhudas Lilladher maintains ‘HOLD’ rating

Analysts at Prabhudas Lilladher have maintained a ‘HOLD’ rating at a price target of ₹195 (unchanged), saying that any sharp correction in crude prices is an upside risk to its estimates. “We believe OMCs earnings will be hit by a sharp jump in diesel marketing losses (current diesel loss at Rs10/litre) given low inventory, gas to oil switch (because of high spot LNG prices), and drop in Russian exports (despite improvement in refining profitability).”

As per the agency, one time grant of LPG subsidy cushioned earnings, while it expects the slowdown in global inventory and lower exports from Russia to support GRMs.

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