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CPCL: A mixed bag

Feb 21, 2005

Performance summary
Chennai Petroleum Corporation, the refining subsidiary of the country's largest downstream petroleum company Indian Oil, announced its 3QFY05 results last month. For 3QFY05, the topline witnessed an impressive growth of over 83% YoY while the bottomline witnessed a dip of over 16% YoY on the back of higher excise payouts, under-recoveries of central sales tax (CST) and low refining margins.

What is the company's business?
Chennai Petroleum has a combined refining capacity of nearly 10 MMTPA (million tonnes per annum), making it one of the largest and the most flexible refinery in South India. The company produces a wide range of petroleum products ranging from diesel, kerosene, LPG to petrochemical feedstocks such as propylene and naphtha. The company recently completed its refinery modernization cum expansion plans, increasing capacity by 3 MMTPA

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 22,178 40,683 83.4% 60,531 98,510 62.7%
Expenditure 20,454 38,424 87.9% 56,789 90,106 58.7%
Operating profit (EBDITA) 1,724 2,259 31.1% 3,742 8,404 124.6%
EBDITA margin (%) 7.8% 5.6%   6.2% 8.5%  
Other income 63 154 144.0% 195 292 49.7%
Interest 50 395 683.7% 359 981 173.4%
Depreciation 253 568 124.8% 777 1,596 105.4%
Profit before tax 1,484 1,450 -2.3% 2,801 6,119 118.5%
Tax 431 567 31.6% 1,005 2,325 131.4%
Profit after tax/(loss) 1,053 883 -16.2% 1,796 3,794 111.2%
Net profit margin (%) 4.7% 2.2%   3.0% 3.9%  
No. of shares (m) 149.0 149.0   149.0 149.0  
Diluted earnings per share (Rs)* 28.3 23.7   16.1 33.9  
Price to earnings ratio (x)         6.5  
(* annualised)            

What has driven performance in 3QFY05?
Import parity doing wonders:  During 3QFY05, CPCL has witnessed an impressive growth of over 83% in the topline on the back of strong realizations aided by the firm international product prices. To put things in perspective, petrol and diesel prices breached US$ 55 per barrel during the period and as a result helped the company improve the topline. Having said that, it also seems that the company could not avail of the economies of scale post the recent expansion plan, which led to an increase of capacity by 3 MMTPA.

Expenditure Table
(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 88.4% 90.5% 89.8% 87.5%
Staff cost 1.0% 0.6% 1.3% 0.7%
Other expenditure 2.8% 3.4% 2.8% 3.3%

Duties hit under the belt:  During the quarter, CPCL witnessed a dip of 220 basis points in the operating margins on the back of a faster growth in expenditure. To put things in perspective, raw material (read crude oil) prices, which form over 95% of the total expenditure, increased during the 3QFY05 by over 210 basis points while higher excise duty burden post the withdrawal of warehousing procedure also led to lower operating margins. Also, it could be lack of economies, which led to the refining margins drop from US$ 3.9 per barrel during the corresponding period last fiscal to US$ 3.8 per barrel during the 3QFY05.

Interest eats into the bottomline:  Although other income increased by 144% during 3QFY05 as compared to the corresponding period last fiscal, the company witnessed a dip of over 16% in the bottomline. This dip could be attributed to higher interest outgo, which increased by nearly 684% on the back of recent expansion plans being implemented by the company, raising debt.

What to expect?
At Rs 219, the stock is trading at a price to earnings multiple of 6.5 times its annualized 9mFY05 earnings. We believe although it is not the cheapest of refinery stocks at current valuations, CPCL has implemented its expansion plan recently and is one of the most complex refineries in the country allowing higher processing capability of hard crude, which is relatively cheaper as compared to the Indian crude mix, thereby enabling the company to improve margins going forward. Also, being IOC's subsidiary, the company is assured of product offtake on the retail side. However, any duty cuts in the upcoming budget could affect CPCL (or other refineries).

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