IIFL says buy Chennai Petro: Limited downside to GRMs from current levels

Chennai Petro: Limited downside to GRMs from current levels
With outlook for global economic growth on the weaker side primarily
in the developed economies, GRMs have remained muted over the
past few quarters. Furthermore, fear of refining supply glut at global
scale added to the woes. However, demand side worries will be
offset by a strong demand emanating from emerging economies such
as India and China. On the supply side refinery closures and delay in
new capacities would provide cushion to GRMs. We expect GRMs to
remain at current levels over the medium term.
CPCL upgrading capacities to improve yields and GRMs
Historically, CPCL’s core GRMs (excluding inventory gains or losses)
have been in line with the benchmark Singapore GRMs. However, we
believe that going ahead, CPCL’s GRMs could turn out to be better
than the benchmark owing to the initiatives its taking to improve its
distillate yield and reduce costs. The key projects towards these
process include 1) Implementing auto fuel quality upgradation
program, 2) Residue Upgradation Project, 3) Tie-up with Shell for
improving refinery efficacy and 4) Single Point Mooring and Crude Oil
Terminal Project. Furthermore, higher production of crude oil from
RIL’s MA-1 oil field will result in improved utilization rates for its
Cauvery basin refinery leading to better operating performance.
Capacity to increase by 70% by 2015
CPCL is also planning to set up a 9.0 MMTPA brown-field refinery
project at Manali, replacing the aging original 2.8 MMTPA refinery at
a cost of Rs100bn to be commissioned by 2015. Following the
completion of project key operating parameters such as complexity
of the refinery, distillate yields, fuel & loss and GRMs would improve.
Undervalued relative to regional pure refining players
Despite substantial improvement in operating performance of CPCL,
the stock continues to trade at a discount to global averages for
refining companies. The stock, currently trades at P/E of 4.7x and
EV/EBIDTA of 5.1x based on FY12 estimates vis-à-vis global average
P/E of 10.5x and EV/EBIDTA of 6.1x. We value the stock at 5.5x
FY12E EV/EBIDTA to derive a target of Rs291. Recommend BUY.