Chennai Petro: It's the industry… - Views on News from Equitymaster

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Chennai Petro: It's the industry…

May 24, 2002

FY02 is one year Chennai Petroleum Corporation Ltd. (CPCL), the south India based refinery, would love to forget. Having said that, the industry has experienced a challenging twenty four months. Domestic petroleum consumption has remained flat over this period. Global economic downturn led to lower petroleum prices in FY02. Oil markets have continued to exhibit volatility in the backdrop of supply adjustments and geo-political tensions.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net sales 18,545 15,072 -18.7% 69,565 60,477 -13.1%
Other Income 324 244 -24.7% 489 395 -19.3%
Expenditure 18,024 13,907 -22.8% 66,237 57,911 -12.6%
Operating Profit (EBDIT) 521 1,165 123.8% 3,328 2,566 -22.9%
Operating Profit Margin (%)2.8%7.7% 4.8%4.2% 
Interest 319 336 5.3% 1,315 1,281 -2.6%
Depreciation 256 45 -82.3% 1,028 790 -23.1%
Profit before Tax2701,028281.2%1,474 889  
Tax (111) 233   250 2520.7%
Profit after Tax/(Loss) 381 795 108.6% 1,224 637 -48.0%
Net profit margin (%)2.1%5.3% 1.8%1.1% 
No. of Shares 149.0 149.0   149.0 149.0  
Diluted earnings per share*10.221.3 11.0 5.7  
P/E Ratio     5.5  
(*annualised)      

Topline sales of CPCL has declined in all four quarters of FY02. But much of the erosion in financials has occurred in 2HFY02. The September 11 events led to sudden halt in global economic activity, which impacted petroleum product prices. Consequently, realisations were adversely hit. Also, the company faced a water shortage, which affected crude throughput.

Operating profits in 4QFY02 have been salvaged by better operating margins. Expense heads have declined across the board. Staff costs for the quarter are lower by 67%, which could be due to workforce rationalisation carried out by IOC. Raw material expenses, which constitute approximately 85% of sales, declined by 17%, which has led to reduced operating costs. Oil prices -- key feedstock -- were lower by 21.5% YoY at an estimated $21.3/ barrel during the concerned period. However, for the full year, margins continued to remain under pressure, as final product prices declined at a faster clip compared to crude oil.

Interest expense, which declined in the past two preceding quarters, has registered a marginal increase. Effective excise duty rate has increased significantly, which could be due to fiscal benefits coming to an end. On the other hand, the effective tax rate has reduced by 11 percentage points to 8%.

At Rs 31 the scrip is quoting on a multiple of 5.5x FY02 earnings. The scrip usually trades within a band of 3x-6x. Petro product prices have improved with a revival in the global economy. Also, reports suggest that throughput has grown in April '02. Consequently, CPCL is likely to experience a better performance in FY02.

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