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Chennai Petro: Margins decimated - Views on News from Equitymaster
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Chennai Petro: Margins decimated
Jan 27, 2009

Performance summary
  • Topline declines by 20% YoY during 3QFY09.
  • EBITDA margins erode to -32% during the quarter, down from 5.8% in 3QFY08 on the back of a crash in gross refining margins (GRMs) to US$ -18.04 per barrel, down from US$ 8.75 per barrel in 3QFY08.
  • Other income declines by 48%.
  • Bottomline stays in the negative for the 2nd quarter in a row, on account of plummeting GRMs and lower other income.
  • Topline grows 38% YoY in 9mFY09, while bottomline turns red. GRMs for 9mFY09 were US$ -0.79 per barrel (US$ 8.08 per barrel in 9mFY08).


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 70,609 56,175 -20.4% 196,192 271,539 38.4%
Expenditure 66,497 74,187 11.6% 182,600 278,397 52.5%
Operating profit (EBDITA) 4,112 (18,013)   13,592 (6,858)  
EBDITA margin (%) 5.8% -32.1%   6.9% -2.5%  
Other income 421 221 -47.5% 1,612 480 -70.2%
Interest 409 834 103.8% 1,430 1,820 27.3%
Depreciation 603 638 5.8% 1,856 1,913 3.1%
Profit before tax 3,521 (19,263)   11,917 (10,111)  
Tax 1,264 (6,564)   4,127 (3,418)  
Profit after tax/(loss) 2,256 (12,699)   7,790 (6,693)  
Net profit margin (%) 3.2% -22.6%   4.0% -2.5%  
No. of shares (m)         148.9  
Diluted earnings per share (Rs)*         (21.8)  
Price to earnings ratio (x)*         -  
*On trailing twelve months earnings

What has driven performance in 3QFY09?
  • CPCL reported a topline decline of 20% YoY during 3QFY09. It achieved a crude thruput of 2.6 m metric tonnes (MMT) during the quarter, up from 2.3 MMT in 2QFY08.

  • The performance in 3QFY09 has been adversely affected due to a steep fall in crude and product prices and increase in the value of raw materials consumed resulting from higher crude holding in the previous quarter due to a deferred shutdown of refinery.

  • Gross refining margins (GRMs) during 3QFY09 crashed to US$ -18.04 per barrel, down from US$ 8.75 per barrel in 3QFY08. GRMs for 9mFY09 were US$ -0.79 per barrel, lower than US$ 8.08 per barrel in 9mFY08. In 2QFY09, the company had reported GRMs of US$ 1.68 per barrel.

  • On the expenditure front, raw material costs increased by 10.3% in 3QFY09 in absolute terms. Moreover, on a percentage of sales basis, there was an increase of 35.5%. This increase combined with the rise in other expenditure (both on an absolute as well as percentage of sales basis) hampered the company’s operating margins.

  • CPCL received a discount of Rs. 12.5 bn from ONGC on crude oil purchased and passed on as discount on products sold to Indian Oil. Accordingly, gross sales and consumption of raw materials for 9mFY09 are net of discount.

  • Other expenditure includes exchange fluctuation loss of Rs 0.9 bn for 3QFY09 and Rs 4.9 bn for 9mFY09. Exchange fluctuation gain of Rs 327.8 m for 3QFY09 and Rs 1,314.5 m for 9mFY09 is included in other income.

What to expect?
The stock is currently trading at price of Rs 104. The extreme fall in the GRMs this quarter is because of the speedy decline in petroleum product prices internationally. The company had to process crude inventory acquired at a record high cost into products whose prices fell even as the refining was underway. Hence, we believe the GRMs will reverse going forward and revert to more comfortable levels. However, there is considerable uncertainty in timing the reversal. As such, the stock is a high risk-high reward bet at current levels.

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