Why HPCL is more vulnerable to fuel price cuts than peers
Hindustan Petroleum Corp. Ltd’s (HPCL) shares are down nearly 30% after hitting a lifetime high of ₹595 apiece on 16 February. The decline may indicate that investors are anxious to book profits because of concerns about a potential cut in fuel prices ahead of the upcoming general elections.
These fears have come true with the government announcing a price cut of ₹2 per litre for petrol and diesel. This is the first cut in prices since May 2022, signaling an end of the high marketing margin period during the nine-month ended December (9MFY24) that oil marketing companies (OMCs) have enjoyed so far. It may be a coincidence that Bharat Petroleum Corp.
Ltd (BPCL) stock also hit a lifetime high on the same day as HPCL shares and started sliding, but its fall from the peak has been curtailed to 18%. Indian Oil Corp. Ltd (IOC) has also moved in tandem with a 22% slide from the high.
Even so, HPCL’s relative underperformance does not make it appealing compared to peers if one has a more positive view on refining margin vis-à-vis marketing margin. While the gross refining margin (GRM) per barrel is not affected by the recent fuel price cut, it does squeeze the gross marketing margin (GMM). From consumers' point of view, the fuel price cut may not appear to be substantial as it is less than 3% of the prevailing prices in most states.
However, there could be a significant adverse impact on the profits of oil marketing companies (OMCs) whose gross earnings include GRM as well as GMM. Since the cut was announced in March, the Q4FY24 numbers will have a negligible impact, but FY25 numbers could be more adversely impacted. For example, HPCL sold 3,463 crore litre of petrol and diesel in FY23, as per its annual report.
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