Chennai Petro: Takes a beating - Views on News from Equitymaster

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Chennai Petro: Takes a beating

Mar 26, 2002

The south India based pure refinery, Chennai Petroleum Corporation Ltd. (CPCL), which was acquired by Indian Oil (IOC) towards the end of the previous fiscal, continues to experience a difficult market environment. Sales of the company have declined in all the three quarters of the fiscal.

(Rs m)3QFY013QFY02Change9mFY019mFY02Change
Net sales 19,483 15,571 -20.1% 51,020 45,405 -11.0%
Other Income 110 60 -45.8% 157 150 -4.3%
Expenditure 18,155 14,720 -18.9% 48,212 44,004 -8.7%
Operating Profit (EBDIT) 1,328 851 -35.9% 2,808 1,401 -50.1%
Operating Profit Margin (%)6.8%5.5% 5.5%3.1% 
Interest 360 313 -13.3% 996 945 -5.1%
Depreciation 224 249 10.8% 765 745 -2.6%
Profit before Tax853349-59.0%1,205 (139) 
Tax 256 -   361 19-94.7%
Profit after Tax/(Loss) 597 349 -41.5% 843 (158) 
Net profit margin (%)3.1%2.2% 1.7%-0.3% 
No. of Shares 149.0 149.0   149.0 149.0  
Diluted earnings per share*16.09.4 7.5 (1.4) 
P/E Ratio  3.5     

The situation on the topline does not seem to be improving. In fact, it has deteriorated for the quarter ended December '01. Sales for the quarter have fallen by 20%, as compared to a 5% slide in the first two quarters. The performance, though, is in line with peer performance. The lower sales are due to poor offtake of petroleum products. Diesel and kerosene, which are the largest constituents in petroleum demand, registered negative growth in consumption. Also, petroleum product prices came under pressure during the third quarter, which impacted realisations. The lower net sales is also due to higher effective excise duty.

While topline declined, operating profits of the company have bounced back. In 2QFY02, the company had reported an operating loss. Operating margins for the December '01 quarter are the highest in the current fiscal. With crude oil prices declining by an estimated 28% YoY, the company is likely to have received some breathing space. Raw material costs are down by 17% and 10% for the quarter and 9 months ended December '01. The lower costs are also due to reduced throughput. During the quarter, gross refining margins are likely to be under pressure, as petroleum product prices have declined at a faster clip compared to crude oil.

With the IOC merger, working capital cycle could have tightened leading to lower short-term borrowings. Interest expense has declined for the past two quarters. Lower depreciation for the year is due to the jump in depreciation charges in the previous fiscal. Most refining companies set up their diesel hydro-desulphurisation plant over FY00 resulting in a higher charge during FY01.

At Rs 33 the scrip is trading on a multiple of 3.5x 3QFY02 annualised earnings. Over the past few weeks, the scrip has been shooting up. With BPCL announcing informal talks to merge its subsidiary, Kochi Refineries Ltd. (KRL), IOC too is contemplating merging its subsidiaries CPCL and Bongaigaon Refinery & Petrochemicals Ltd. (BRPL). The book value of CPCL at end of FY01 was Rs 83 per share. The significant discount to book value has triggered buying, as the merger ratio is likely to be in favour of CPCL. BRPL has a book value of Rs 28.

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