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.
crude oil processed
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.
Operating profit (EBDITA)
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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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