CHENNAI PETROLEUM: Lower inventory losses :: Edelweiss

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GRMs, at USD 4.1/bbl, above estimates due to lower inventory losses
Chennai Petroleum’s (CPCL) Q2FY11 reported GRM, at USD 4.1/bbl, was higher
against our estimate of USD 3.4/bbl. Refining margins fell 2% Y-o-Y (USD
4.2/bbl), but rose 129% Q-o-Q (USD 1.8/bbl). GRMs rose Q-o-Q due to minimal
inventory losses in Q2FY11 against Q1FY11; they, however, fell Y-o-Y despite
improvement in operational GRMs due to absence of inventory gains (Q2FY10).
CPCL booked INR 273.5 mn in product inventory losses against INR 453.2 mn
gains in Q1FY11. Refinery throughput, at 2.78 MMT, was in line with our estimate
of 2.88 MMT; it jumped 19.6% Q-o-Q (lower throughput in Q1FY11 due to a delay
in start-up of CDU unit) and 0.8% Y-o-Y. Based on its current expanded capacity
of 11.5 mmtpa, CPCL’s Q2FY11 capacity utilisation was 96%.
􀂄 Interest costs have gone up with a rise in debt; may inch up further
CPCL reported higher interest expenses at INR 469 mn against INR 348 mn during
the previous quarter. Blended cost of debt was 5.1%. Interest expenses increased
due to rise in debt from INR 34.0 bn to INR 36.7 bn. Higher debt, in turn, was
owing to higher working capital loans and draw on account of project capex. Going
forward, we expect interest expenses to rise further due to higher cost of debt and
increased funding requirements. Exchange loss for the quarter stood at INR 268
mn with a cumulative exchange loss of INR 824 mn for H1FY11.
􀂄 Outlook and valuations: SOTP at INR 248/share; maintain ‘HOLD’
We broadly maintain our FY11E and FY12E earnings estimates after adjusting for
inventory losses, lower-than-expected refining margins and updated annual
report data. Also, we have toned down our FY11E GRM estimate to USD 5.0/bbl
and FY12E estimate to USD 6.1/bbl. Post adjustment, our new FY11E and FY12E
EPS stand at INR 24.8/share and INR 35.3/share, respectively.
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. We are introducing
SOTP fair values for CPCL (valued at 5.5x EV/EBITDA) after the recent annual
report update, and have valued CPCL at INR 248/share. Hence, we continue our
‘HOLD’ and ‘Sector Performer’ recommendation on the stock. At CMP of INR
250/share, CCPL is trading at FY11E and FY12E P/E of 10.1x and 7.1x,
respectively.