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Chennai Petro: GRMs propel bottomline
May 20, 2010

Chennai Petroluem announced its FY10 results. The company reported a 22% YoY decline in sales, while netprofits returned to black during the year. Here is our analysis of the results.

Performance summary
  • Topline grows by 14% YoY during 4QFY10 due to higher realisations, despite lower throughput.
  • EBITDA margins turn negative during the quarter, down from 10.8% in 4QFY09. This is due to a decline in gross refining margins to US$ 4.27 per barrel, down from US$ 6.6 per barrel in 4QFY09.
  • Other income grows by 11 times during the quarter.
  • Bottomline turns negative during the quarter on account of lower GRMs, despite higher other income.
  • For FY10, topline declines by 22%, while the bottomline turns positive.

Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales   48,100   54,653 13.6%   319,639   249,726 -21.9%
Expenditure   42,905   55,221 28.7%   321,303   241,195 -24.9%
Operating profit (EBDITA)     5,194       (568)        (1,664)        8,532 -612.9%
EBDITA margin (%) 10.8% -1.0%   -0.5% 3.4%  
Other income           60         690 1044.4%           541        2,351 334.8%
Interest         417         425 2.0%        2,237        1,374 -38.6%
Depreciation         659         644 -2.2%        2,572        2,671 3.9%
Profit before tax     4,180       (947)        (5,931)        6,838  
Tax     1,460       (336)        (1,958)           805  
Profit after tax/(loss)     2,720       (611)        (3,973)        6,032  
Net profit margin (%) 5.7% -1.1%   -1.2% 2.4%  
No. of shares (m)                   149  
Diluted earnings per share (Rs)                     41  
Price to earnings ratio (x)                    6.3  

What has driven performance in FY10?
  • Chennai Petro reported a topline decline of 22% YoY during FY10. It achieved a crude throughput of 10.06 m metric tonnes (MMT) during the year, down from 10.13 MMT in FY09. Gross refining margins (GRMs) during FY10 was US$ 4.75 per barrel, up from US$ 1.22 per barrel in FY09.

  • On the expenditure front, raw material costs increased by 26.4% YoY in 4QFY10 in absolute terms. As a percentage of sales basis, there was an increase of 9.6%.This increase accounted for the decline in the company's operating margins.

    Cost break up
    (Rs m) 4QFY09 4QFY10 Change
    Raw materials   41,308   52,206 26.4%
    % sales 85.9% 95.5%  
    Staff cost         139     1,179 746.0%
    % sales 0.3% 2.2%  
    Other expenditure     1,458     1,836 25.9%
    % sales 3.0% 3.4%  
    Total cost   42,905   55,221 28.7%
    % sales 89.2% 101.0%  

  • Other income includes foreign exchange fluctuation gain of Rs 1,748 m during FY10. Foreign exchange fluctuation loss of Rs 5,337 m for FY09 is included in other expenditure.

  • The company's board of directors recommends a dividend of Rs 1.2 per share.

What to expect?
The stock is currently trading at a price of Rs 257 at trailing 12-months earnings multiple of 6.3 times. The company has recovered from the extreme fall in the GRMs in 3QFY09 due to inventory losses caused by the speedy decline in petroleum product prices internationally. We had mentioned then that the GRMs will reverse going forward and revert to more comfortable levels, which they have. However, from this point forward, we expect GRMs to hover around the present mark. As such, we expect the stock to have a marginal upside from these levels. Also, we believe pure refining stocks are a risky bet over the long term as they have very little control over their fortunes and are excessively dependent on the swings of GRMs worldwide.

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