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CHENNAI PETROLEUM CORPORATION
Results below estimates due to shutdowns
GRM, at USD 5.3/bbl, was below expectation due to shutdowns
Chennai Petroleum Corporation’s (CPCL) Q3FY11 reported GRM, at USD 5.3/bbl
(+54.9% Y-o-Y, +30.0% Q-o-Q), was lower than our estimate of USD 6.0/bbl.
Refining margins were lower than estimate due to shutdown of CDU-2 (3.8 mmt,
for 6-7 days) and VGO units (almost the entire quarter). CPCL was unable to take
advantage of increase in diesel spreads, as shutdown of its secondary units led to
lower production of diesel. CPCL booked INR 1.5 bn of product inventory gains
during Q3FY11 against INR 2.7 bn loss reported in Q2FY11. Refinery throughput,
at 2.80 MMT (+0.7% Q-o-Q, +1.9% Y-o-Y), was in line with our estimates.
Capacity utilisation during Q3FY11 was 97.4%. Operating costs (excluding
exchange gain/loss) was higher for Q3FY11 at USD 2.4/bbl or INR 1.6 bn (+18.2%
Q-o-Q, +28.2% Y-o-Y) due to costs related to shutdown and higher demurrage
costs at the Chennai port.
Interest costs higher at INR 545 mn
Interest expenses, at INR 545 mn, were higher by 16% Q-o-Q due to: (a) Higher
level of average debt at INR 39.5 bn in Q3FY11 against INR 36.7 bn in Q2FY11;
and (b) 41bps rise in the cost of debt due to market conditions and INR
depreciation. Exchange gain for the quarter stood at INR 678 mn with a cumulative
exchange loss of INR 146 mn for 9mFY11.
Outlook and valuations: SOTP at INR 264/share; maintain ‘HOLD’
We broadly maintain our FY12E earnings, while we have cut our FY11E PAT to
incorporate lower earnings for Q3FY11. Our new FY11E and FY12E EPS stand at
INR 23.1/share and INR 34.6/share, respectively.
We are rolling forward our fair value estimate to March 2012 and now estimate
CPCL’s fair value (@5.5x EV/EBITDA) at INR 264/share. Going forward, we
expect refining margins to gradually revive as global demand surpasses new
supplies. Hence, we expect an improvement in CPCL’s GRMs as well. On the
other hand, CPCL’s FY11 cash flows will be used for lower ROI based projects
(Euro IV), which will be an overhang on the stock. Hence, we continue our
‘HOLD’ and ‘Sector Performer’ recommendation on the stock. At CMP of INR
225/share, CPCL is trading at FY12E and FY13E P/E of 6.5x and 6.7x,
respectively.
Company Description
CPCL, erstwhile Madras Refineries, is the largest refinery in South India with a refining
capacity of 11.5 mtpa across two locations—Manali and Cauvery Basin, both in Tamil
Nadu. It also has a lube refining capacity of 0.27 mtpa and a wax production capacity of
30,000 mtpa. Currently, IOC holds 67.29% in CPCL and it markets its refined products
through its parent.
Investment Theme
The company is one of the more complex PSU refineries in the country and will benefit
from higher distillate yield, crude mix, and product swings in a scenario of larger spreads
between light and heavy crude. CPCL’s ability to use high sulphur crude will further help
its refining margins. Also, the company’s coastal location enables easier access to crude
and its status as the only refinery in Tamil Nadu ensures sufficient demand. IOC’s
majority ownership provides CPCL with marketing and distribution access in South India
and Sri Lanka.
Key Risks
Volatility in refining margins, either due to lower demand for refined products or excess
refining capacity.
Any sharp INR depreciation will affect standalone refiners like CPCL negatively.
Faster-than-expected decrease in duty differential between petroleum products and
crude could pose a risk to our target price.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
CHENNAI PETROLEUM CORPORATION
Results below estimates due to shutdowns
GRM, at USD 5.3/bbl, was below expectation due to shutdowns
Chennai Petroleum Corporation’s (CPCL) Q3FY11 reported GRM, at USD 5.3/bbl
(+54.9% Y-o-Y, +30.0% Q-o-Q), was lower than our estimate of USD 6.0/bbl.
Refining margins were lower than estimate due to shutdown of CDU-2 (3.8 mmt,
for 6-7 days) and VGO units (almost the entire quarter). CPCL was unable to take
advantage of increase in diesel spreads, as shutdown of its secondary units led to
lower production of diesel. CPCL booked INR 1.5 bn of product inventory gains
during Q3FY11 against INR 2.7 bn loss reported in Q2FY11. Refinery throughput,
at 2.80 MMT (+0.7% Q-o-Q, +1.9% Y-o-Y), was in line with our estimates.
Capacity utilisation during Q3FY11 was 97.4%. Operating costs (excluding
exchange gain/loss) was higher for Q3FY11 at USD 2.4/bbl or INR 1.6 bn (+18.2%
Q-o-Q, +28.2% Y-o-Y) due to costs related to shutdown and higher demurrage
costs at the Chennai port.
Interest costs higher at INR 545 mn
Interest expenses, at INR 545 mn, were higher by 16% Q-o-Q due to: (a) Higher
level of average debt at INR 39.5 bn in Q3FY11 against INR 36.7 bn in Q2FY11;
and (b) 41bps rise in the cost of debt due to market conditions and INR
depreciation. Exchange gain for the quarter stood at INR 678 mn with a cumulative
exchange loss of INR 146 mn for 9mFY11.
Outlook and valuations: SOTP at INR 264/share; maintain ‘HOLD’
We broadly maintain our FY12E earnings, while we have cut our FY11E PAT to
incorporate lower earnings for Q3FY11. Our new FY11E and FY12E EPS stand at
INR 23.1/share and INR 34.6/share, respectively.
We are rolling forward our fair value estimate to March 2012 and now estimate
CPCL’s fair value (@5.5x EV/EBITDA) at INR 264/share. Going forward, we
expect refining margins to gradually revive as global demand surpasses new
supplies. Hence, we expect an improvement in CPCL’s GRMs as well. On the
other hand, CPCL’s FY11 cash flows will be used for lower ROI based projects
(Euro IV), which will be an overhang on the stock. Hence, we continue our
‘HOLD’ and ‘Sector Performer’ recommendation on the stock. At CMP of INR
225/share, CPCL is trading at FY12E and FY13E P/E of 6.5x and 6.7x,
respectively.
Company Description
CPCL, erstwhile Madras Refineries, is the largest refinery in South India with a refining
capacity of 11.5 mtpa across two locations—Manali and Cauvery Basin, both in Tamil
Nadu. It also has a lube refining capacity of 0.27 mtpa and a wax production capacity of
30,000 mtpa. Currently, IOC holds 67.29% in CPCL and it markets its refined products
through its parent.
Investment Theme
The company is one of the more complex PSU refineries in the country and will benefit
from higher distillate yield, crude mix, and product swings in a scenario of larger spreads
between light and heavy crude. CPCL’s ability to use high sulphur crude will further help
its refining margins. Also, the company’s coastal location enables easier access to crude
and its status as the only refinery in Tamil Nadu ensures sufficient demand. IOC’s
majority ownership provides CPCL with marketing and distribution access in South India
and Sri Lanka.
Key Risks
Volatility in refining margins, either due to lower demand for refined products or excess
refining capacity.
Any sharp INR depreciation will affect standalone refiners like CPCL negatively.
Faster-than-expected decrease in duty differential between petroleum products and
crude could pose a risk to our target price.
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