Passing through tough times… Chennai Petroleum :: ICICI Securities, pdf link

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Passing through tough times…
We met the management of Chennai Petroleum Corporation Limited
(CPCL) to understand the company’s business and strategy in detail.
CPCL is an Indian Oil Corporation company that owns 51.9% in the
company while 15.4% is owned by National Iranian Oil Company (NIOC).
CPCL has two refineries with a combined refining capacity of 11.5
MMTPA. The Manali Refinery at Chennai has a capacity of 10.5 MMTPA
with a Nelson complexity of 8.2 and the second refinery is located at
Cauvery Basin at Nagapattinam that has a capacity of 1 MMTPA. CPCL
also has a wax plant with installed capacity of 30,000 tonnes per annum,
which is designed to produce paraffin wax. CPCL reported crude oil
throughput of 10.6 mmt and gross refining margins of US$ 4 per barrel in
FY14. Over the last 3 years, CPCL’s performance was negatively impacted
due to volatility in currency & crude oil prices and extended shutdown of
refineries. The company reported GRM’s of US$ 1.3/bbl, US$ 1/bbl and
US$ 4/bbl in FY12, FY13 and FY14, respectively.
ƒ Capex plans to improve yields
CPCL has two major projects under implementation, resid up-gradation
project and 42’ crude oil pipeline project. The resid up-gradation plant
expected to be set up at an estimated cost of |3110 crore will improve the
distillate yield from 70% to 76%. This project is expected to be completed
by Q3FY16. The other major project for the company is the new 42” crude
oil pipeline that will reduce pumping time and demurrage incidence. The
company has obtained the CRZ clearance and the last clearance from
NHAI under Ministry of Road Transport is due. After this approval, the
company will build the pipeline within a timeframe of 18 months at an
estimated cost of | 257 crore. These projects are expected to improve the
current GRM by ~US$2 per barrel.
ƒ Improvement in refining margins key to performance
CPCL needs to report Gross Refining Margins (GRM’s) of US$ 4 per barrel
to achieve break-even in profitability. With the GRM’s under pressure due
to global slowdown, CPCL had reported loss in the couple of years. CPCL
had reported GRM’s of US$ 1.9 per barrel in Q1FY15 which depicts that
the company may find it difficult to report improved performance in the
near future. Only, post the new resid up-gradation in H2FY17, we expect
an improvement in results. The company is currently trading at FY14
EV/EBITDA ratio of 6.7x and P/BV of 0.9.


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technicals: M & M, Chennai Petro, United Spirits, Dishman Pharma, Wire & Wireless, NHPC, :: Business Line

Chennai Petroleum: Poor fare; but bottom closer ::Elara

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Poor fare; but bottom closer
Forex losses continue to hit hard
CPCL reported another poor quarter with in-line revenue of INR111bn
but forex losses hitting the EBITDA and bottom-line. The Q3FY12
EBITDA came in at INR619mn, significantly below Street estimates of
INR1.5-2.0bn, while CPCL reported a net loss of INR634mn. The
company reported GRMs of USD3.36/bbl, below our estimate of
USD4.3/bbl. The Q3FY12 throughput was also affected marginally due
to the cyclone hitting the east coast leading to a standstill in crude
supply around Dec’11-end.
Key takeaways from concall: GRMs break-up and refinery plans
􀂃 The inventory gain for Q3FY12 was INR1.48bn (USD1.48/bbl),
while the exchange related losses net of crude (INR2.23bn) and
product gains (INR0.20bn) were INR2.03bn (USD2.04/bbl). With
the reported GRMs of USD3.36/bbl, our analysis suggests that the
operational margin was ~USD3.9/bbl. We expect better Q4FY12
GRMs, as well as FY13 due to recovery in spreads of light products.
􀂃 CPCL achieved ~70% of distillate yield in Q3FY12 (22% light and
47.9% middle distillates) while the fuel and loss was higher 9.8%
due to additional fuel consumption for secondary units. Post the
residue upgradation project in FY13, CPCL expects the distillate
yield to reach 85-90%. Also, CPCL would be taking a 2-month
shutdown in Jun/Jul 2012, post which another 0.6MMT of
capacity will be blended in through debottlenecking.
􀂃 Capex for FY12 so far stands at INR3.2bn, and it should be INR5bn
for FY12 and around INR8bn for FY13.
Still some pain left, but bottom getting closer; Upgrade to Reduce
We upgrade CPCL to Reduce from Sell as we see the stock bottoming
out after declining 14% and under-performing the Sensex by 23%
since our downgrade in Oct’11. We see operational concerns hurting
earnings for another 2-3 quarters, which should keep CPCL under
pressure. In the near term, we would turn positive only if CPCL corrects
another 10-12% from the current levels. CPCL trades at 6x EV/EBITDA
on FY14 estimates, a slightly rich multiple for a simple refiner. We value
CPCL at 5.5x EV/EBITDA, revising our TP to INR160/sh.

Chennai Petroleum: Buy :Business Line

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Investors with a long-term perspective can consider investing in the stock of standalone refiner, Chennai Petroleum (CPCL). Attractive valuations, and refinery up-gradation and capacity expansion plans which should boost earnings, support our recommendation. The CPCL stock tumbled after the company posted losses in the June 2011 quarter. The poor report card was a result mainly of lower refining margins (on sequential basis) and plant shutdown. Since end-July, when the results were declared, the stock has lost around 11 per cent compared to the 8 per cent drop in the Sensex. At its current price of Rs 195, the stock discounts its trailing 12 month earnings by 5.7 times, lower than its historical average and cheaper than the nine times at which peer MRPL currently trades at.

After a solid performance in the March quarter when CPCL clocked gross refining margin (GRM) of $8.3 a barrel, the company, like most public sector refiners, delivered a disappointing June 2011 quarter. Its GRM dipped to $2.35 a barrel, though this was better than the $1.79 a barrel posted in the year-ago period.

The decline in sequential performance seems to be the result of high volatility in crude oil prices which crimped inventory gains, reduction in product cracks, and a 22-day maintenance closure at its units. Result: CPCL posted a loss of around Rs 55 crores in the June quarter, compared with profit of Rs 314 crore in the March quarter. While oil prices continue to yo-yo, better product cracks and improved utilisation levels should aid the company 's margins.

GROWING CAPACITY

Besides, what lends confidence to the company's prospects is its continuing expansion and upgradation programmes. Revamp of a unit at its mainstay Manali complex near Chennai expanded CPCL's total refining capacity from 10.5 mtpa to 11.5 mtpa. It is also ramping up the capacity of another unit in Manali by 0.6 mtpa. This process, expected to be completed by May 2012 should take the company's capacity to 12.1 mtpa, and enhance earnings. In addition, the company is actively considering putting up a greenfield refinery at Manali of 6 mtpa, which will raise total capacity to 18.1 mtpa.

Besides, CPCL plans to implement a resid upgradation project, for which environmental clearance is awaited. This project should improve the company's high-value distillate yield by 6 to 7 per cent, and improve refining margins by around $2 a barrel.

Other projects include the company's Euro IV project for auto fuel quality upgradation, which is underway and is expected to be completed by December 2011. The company also plans to replace by November 2012 the existing 30 inch pipeline from the Chennai port to the Manali refinery with a new 42 inch pipeline to enhance the discharge rate from tankers and reduce demurrage cost. Besides, the 20-inch pipeline project connecting Karaikkal Port to the company's 1 mtpa capacity Cauvery Basin Refinery is expected to be completed by December 2011.

CPCL has also entered into an agreement with the Karaikkal Port for bringing in bigger vessels with crude supplies to the Cauvery Basin Refinery. This should enhance the refinery's utilisation levels. CPCL's debt-to-equity ratio stands at 0.99, providing scope for further leverage to fund expansion plans. Also, the company's dividend yield has been quite healthy and stood at around 5.5 per cent in the recent period

Chennai Petroleum: Buy:: Business Line

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An optimistic outlook for the refining sector, expected improvement in the company's utilisation levels, and a sharp decline in the stock's price make Chennai Petroleum (CPCL)an attractive buy for investors with a long-term perspective. The stock has been a significant under-performer, losing around 28 per cent since the beginning of the fiscal, compared with the 3 per cent gain in the Sensex.

CHENNAI PETROLEUM - Results below estimates due to shutdowns: Edelweiss

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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.

Chennai Petroleum - Refined future: Elara

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Refined future
Upside exists even amid conservative valuations
We initiate the research coverage on Chennai Petroleum (CPCL) with
an Accumulate rating and a target price of INR280/share, implying an
upside of 15% from the current levels with a 12-month time horizon.
We believe that the stock is under-valued despite factoring in lower
GRMs since CPCL is comparatively a simpler refiner with a complexity
of 7.3. Even with our conservative FY12 GRM assumption of USD5-
5.5/bbl, CPCL currently trades at 6x EV/EBITDA against the regional
peer (similar refiners) EV/EBITDA average of around 7x.
Correspondingly, on the P/E basis, the stock trades at 9x while most
Asia players are trading at 12x plus. CPCL currently trades below the
book value at a P/B of 0.9x despite sound ROE levels and a 5%
dividend yield, one of the highest in the region.

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.

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.