HPCL is on a good ride today morning. The stock which had closed yesterday at Rs.408.50, has opened today at Rs.424.30, going on to hit an intra day high at Rs.425.05 and currently remains at Rs.423 levels, up almost 4%.

The Oil Marketing (OMCs) PSU declared its Q4/FY14 numbers yesterday after market closing. The stock is reacting to the better-than-expected numbers, with net profit for the quarter coming in at Rs.4609 crore, down 40% (YoY) but much better than the loss of Rs.1734 crore it posted in Q3.

Companies like HPCL, BPCL and Indian Oil, which are essentially all OMCs, buy fuel from upstream companies ONGC, GAIL and Oil India. The upstream companies buy crude at global prices and hence sell at global prices. But this results in huge under recoveries for OMCs, meaning loss between their purchase price of crude and the retail price at which they sell the fuel. To help tide over the under recoveries, Govt issues oil bonds and gives cash subsidies.  OMCs under recoveries are to be borne by upstream companies, which is at 33%. Apart from this 33% under recovery burden shared by companies, similar amount is contributed by the Govt by way of cash subsidy and the rest is either absorbed by the retailers or passed on to consumers.

Thus in Q4FY14, HPCL lost Rs.9,183 crore due to selling fuel at subsidy and this was compensated with Rs.5671 crore coming from upstream companies and the Govt’s cash subsidy was to the tune of Rs.6,983 crore, which included Q3 subsidy also. Thus in Q4, the company actually made a profit on fuel recovery.

The company ended FY14 with a consolidated net profit at Rs.1080 crore, up from Rs.501 crore in FY13. And during the fiscal, upstream oil companies paid up Rs.16,771 crore and Govt’s cash subsidy was Rs.15,215 crore. Thus the under recovery loss was at Rs.482 crore.