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CPCL: Then and now

Jun 12, 2006

After having studied Kochi Refineries and MRPL, we now turn our focus to the biggest player in the Southern India, Chennai Petroleum Corporation limited (CPCL). CPCL, which performed excellently in FY05, saw a sudden reversal in its fortunes in FY06. What is the company's business?

Chennai Petroleum Corporation Limited (CPCL), an IOC subsidiary, is the largest refining company in Southern India (30% of installed capacity in the region and 8% of the country's refining capacity).CPCL has two refineries with a combined refining capacity of 10.5 Million Tonnes Per Annum (MMTPA). The Chennai refinery has a capacity of 9.5 MMTPA and the other one at Cauvery Basin near Nagapattinam has a capacity of 1.0 MMTPA. A 3 MMTPA-refinery expansion project in 2004 in Chennai led to an increase in the secondary processing capacity from a modest level of 23% to 45% of the expanded capacity. Once the expanded facility gains in scale, it will benefit CPCL (ability to produce high-value added products complying Bharat –II and Euro III equivalent environmental standards).

What the numbers say?

Capacity utilisation analysis: CPCL's utilisation levels have been healthy (above 90%) during FY01 to FY06 due to the increase in demand for petroleum products in India. Though the capacity utilisation dipped in FY05, it needs to be borne in mind that that the company enhanced its capacity during the year and was only partly operational.

Particulars FY01 FY02 FY03 FY04 FY05 FY06
capacity(MMTPA) 7.0 7.0 7.0 7.5 10.5 10.5
crude oil processed 6.6 6.7 6.8 7.0 8.9 10.4
Capacity utilisation 95% 96% 97% 94% 85% 99%

Financial analysis: Sales have grown at a CAGR of 24% during FY00-FY06, which was driven by increase in petroleum products prices globally and higher output (through capacity hikes). Operating profits grew by 27% over the corresponding period in light of remunerative gross refining margins (GRMs). GRM's has increased marginally over the past, before declining in FY06; it is largely a result of discounts on the sale of petroleum products to refineries in India. In fact, this is the case for all the standalone refineries in country and is the result of political compulsions.

Financial snapshot…
(Rs m) FY01 FY02 FY03 FY04 FY05 FY06
Net sales 71,326 60,477 80,552 87,390 142,136 211,288
Expenditure 67,998 57,911 73,989 80,329 129,899 200,374
Operating profit (EBDITA) 3,328 2,566 6,562 7,061 12,237 10,914
EBDITA margin (%) 4.7% 4.2% 8.1% 8.1% 8.6% 5.2%
Other income 481 395 404 304 760 418
Interest 1,315 1,281 1,067 468 1,567 1,740
Depreciation 1,020 790 1,020 1,175 2,094 2,358
Profit before tax 1,474 889 4,880 5,723 9,336 7,234
Tax 250 252 1,851 1,722 3,364 2,424
Profit after tax/(loss) 1,224 637 3,029 4,001 5,973 4,810
EPS 8 4 20 27 40 32
CEPS(Rs.) 15 10 27 35 54 48
Networth per share 83 69 87 108 135 153
Debt Equity ratio 0.9 1.2 1.5 1.5 1.2 N.A.

However, PBT and PAT grew at a much faster rate of 37% and 31% during FY01-FY06 due to the leverage effect. CPCL raised debts to funds its capacity expansions as well as re-financing high cost debts in its books. Also, the increased capacity utilisation led to lower fixed cost per unit. This is partly reflected in depreciation charges declining as a percentage of sales (1.4% in FY01 to 1.1% in FY06).

What to expect?
At the current price of Rs 156, the stock is trading at price to earnings multiple of 4.9 times FY06 earnings. The upswing in the refining business along with the support from IOC on the marketing and crude procurement fronts helped the company over the past few years. Going forward, while demand is not a big issue, the recent government's announcement of shifting from import parity pricing to trade parity pricing and reduction of custom duty on petrol and diesel (major outputs of refineries) will lead to lower GRM's. This will impact the profitability of the refining companies in general, including CPCL. Also, discounts to oil marketing companies on the sale of petroleum products front is also a cause for concern and will continue to weigh on the company's profitability (discount as a percentage of net sales in FY06 was 2%). Overall, we believe that the risk reward equation is skewed towards risks at the current juncture.

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