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  • Stock Recommendation | CHENNAI PETROLEUM CORPORATION LTD (CPCL) – BUY – Target Price : 301

    Publish date: JANUARY 30, 2019

    Dismal Performance: CPCL reported higher than expected net loss. Lower capacity utilization level due to planned shut-down for maintenance, weak refining margins due to steep correction in product prices, implied inventory losses and higher operating cost impacted the performance during the quarter.


    We believe newly commissioned project will improve the earnings and weaker currency will be further positive. Major capex plans lined up which will boost its long term profitability, we opine.

    CPCL’s average GRM stood at US$3.92/bbl in 9MFY19 as against US$ 6.64/bbl in 9MFY18 due to steep fall in product and crude oil prices.

    Operating cost per unit has increased to US$2.89/bbl (+22% qoq and 25% yoy) due to lower production. With the increase in production volume, we expect it to come down, going ahead.

    CPCL is currently implementing a number of projects to improve reliability, profitability and to meet product quality specifications. The total cost of these projects which are under implementation is estimated to be Rs.25.4 bn.


    We have revised our earnings to reflect 9MFY19 results and lower GRMs. Hence, we now expect CPCL to report an EPS of Rs.60 in FY20E (earlier Rs. 63) supported by better distillate yields, weaker INR/USD and higher crude throughput. At CMP, we believe that the stock is attractively valued at a PE of 4x FY20E earnings. We maintain BUY recommendation on the stock with a revised price target of Rs.301/share (earlier Rs.314/share). We have valued CPCL based on PE multiple of 5x FY20, which is at a significant discount to its peers.





    Revenue growth: CPCL’s net revenue decreased 20% qoq to Rs.120 bn due to 21.4% qoq decrease in crude throughput and lower product prices.

    Crude throughput: CPCL reported lower crude throughput of 2.28 mmt, (-21% qoq and -17% yoy) resulting in lower (75%) capacity utilization. Due to planned maintenance of the refinery the crude throughput was lower. From 6th Oct’18, CPCL had shut a 74,000 bopd crude unit at its 210,000 bpd Manali refinery for one month for maintenance.




    Implied refining margins: CPCL’s implied GRMs stood lower at US$ (-) 1.07/bbl as against US$4.96/bbl in Q2FY19 partly due to steep fall in product and crude oil prices. Average GRM stood US$3.92/bbl in 9MFY19 as against US$ 6.64/bbl in 9MFY18.

    Raw material cost including purchases of finished goods: Raw material cost decreased 18% qoq to Rs.94.5 bn (+20% yoy) mainly due to decrease in crude oil prices, and lower crude throughput. In Q3FY19, average crude oil price decreased by 9% qoq to US$ 67.4/bbls.

    Employee cost: Staff cost has decreased 3% qoq to Rs.1.1 bn (-11% yoy). Employee cost to sales ratio (%) has increased 20 bps to 1%.

    Other expenses: CPCL’s other expenditure decreased by 1% qoq to Rs.2.4 bn (+34% yoy). Operating cost per unit has increased to US$2.89/bbl (+22% qoq and 25% yoy) due to lower production. With the increase in production volume, we expect it to come down, going ahead.

    Operating profit: CPCL reported lower EBIDTA of Rs. (-) 3.45 bn in Q3FY19 as against Rs.8.34 bn in Q2FY18 on account of lower refining margins, lower sales volume, and inventory losses.

    Interest cost: CPCL’s interest cost has increased by 3% qoq and 7% yoy to Rs.1.1 bn (includes preference dividend).

    Preference Shares are treated as financial liability as per Ind AS 32, as these are redeemable on maturity for a fixed determinable amount and carry fixed rate of dividend. Correspondingly, in line with the requirements of Ind AS 32, proportionate preference dividend including dividend distribution tax thereon, has been provisionally accrued as finance cost for Q3FY19. However, as per the Companies Act 2013, the preference shares are treated as part of share capital and the provisions of the Act relating to declaration of Preference Dividend at the end of the year would be applicable.

    Depreciation: In Q3FY19, depreciation cost increased 3% yoy to Rs. 1.11 bn (+30% qoq).

    Other income: In Q3FY19, other income has decreased meaningfully 30% qoq (partly base effect) to Rs.99 mn (-87% yoy) party due to lower interest and dividend income earned.

    PAT: Multiple adverse factors impacted the quarterly profitability of CPCL. The company has reported a net loss of Rs.3.63 bn due to lower crude throughput, lower realization, lower other income and inventory losses.


    Expansion Plans: IOC (promoter of CPCL) has indicated that Iran (Naftiran Intertrade, the Swiss subsidiary of National Iranian Oil Company, holds a 15.4% stake in CPCL) is looking to invest in CPCL for expansion and up-gradation of its refinery. CPCL plans to shut down the 1 million tonne per year (i.e ~20,000 bbl/d) Nagapattinam refinery and replace it with a new 9 million tonne per annum unit (i.e ~1,80,000 bbl/d) over the next 5-6 years with an investment of around Rs.356.98 bn (US$ 5.1 bn). CPCL plans to achieve financial closure of the refinery expansion in 2019. It also plans to build a petrochemicals plant of about 0.475 mmtpa. We have not modeled the same as we await a financial closure.

    Future Projects: CPCL is currently implementing a number of projects to improve reliability, profitability and to meet product quality specifications. The total cost of these projects which are under implementation is estimated to be Rs.25.4 bn.

    With the completion of the new crude oil pipeline project, the BS-VI Project is likely to be completed in FY20.

    RLNG project is scheduled to be completed in phases from Nov 2018 onwards.

    CPCL is also planning to set up a 9 mmtpa refinery at Cauvery Basin, Nagapattinam at an estimated cost of Rs.274.5 bn (plus or minus 30%). In principle approval has been obtained for this project. The proposed new project will play an important role in meeting future energy needs of Tamilnadu State. Preparation of detailed feasibility report is underway and is expected to be completed by March 2019.


    we now expect CPCL to report an EPS of Rs.60 in FY20E (earlier Rs. 62.7) supported by better distillate yields, weaker INR/USD and higher crude throughput. At CMP, we believe that the stock is attractively valued at a PE of 4x FY20E earnings. We maintain BUY recommendation on the stock with a revised price target of Rs.301/share (earlier Rs.314/share). We have valued CPCL based on PE multiple of 5x FY20, which is at a significant discount to its peers.




    Wide fluctuations in crude, forex and product prices can impact the margins. If global fuel supply exceeds demand then margins can be under pressure and vice-versa.

    Any delay in executing the project can significantly impact the valuations.

    Large outlay for new projects exposes CPCL to significant project implementation risks


    Incorporated in 1965, Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries Limited (MRL) was formed as a joint venture between the Government of India (74%, GoI), AMOCO (13%) and National Iranian Oil Company (13% equity stake) In 1985, AMOCO sold its equity stake to GOI and the shareholding pattern of GOI and NIOC changed to 84.62% and 15.38% respectively. Later in 1992, GOI disinvested 16.92% of the paid up capital in favor of Unit Trust of India, Mutual Funds, Insurance Companies and Banks, thereby reducing its holding to 67.7 %. CPCL came out with a public issue in 1994 wherein GoI and NIOC divested part of their equity stakes and CPCL's shares were listed on stock exchanges. As a part of the restructuring steps taken up by the Government of India, Indian Oil Corporation Ltd. acquired equity from GoI in FY 2001. In July 2003, NIOC transferred their entire shareholding to Naftiran Inter trade Company Limited, an affiliate, in line with the formation agreement, as part of their organizational restructuring.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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