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Chennai Petro: Back into the red - Views on News from Equitymaster

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Chennai Petro: Back into the red
Jul 29, 2010

Chennai Petroluem announced its 1QFY11 results. The company reported a 12% YoY growth in sales, while net profits fell into the red during the period. Here is our analysis of the results.

Performance summary
  • Topline grows by 12% YoY during 1QFY11 due to higher realisations, despite lower throughput.
  • EBITDA margins declines to 0.3% during the quarter, down from 8.3% in 1QFY10. This is due to a decline in gross refining margins (GRMs) to US$ 1.79 per barrel, down from US$ 6.88 per barrel in 1QFY10.
  • Other income declines by 91% during the quarter.
  • Bottomline turns negative during 1QFY11 on account of lower GRMs and other income.


(Rs m) 1QFY10 1QFY11 Change
Net sales 56,604 63,277 11.8%
Expenditure 51,927 63,096 21.5%
Operating profit (EBDITA)        4,677          181 -96.1%
EBDITA margin (%) 8.3% 0.3%  
Other income           884            80 -91.0%
Interest           279          348 24.4%
Depreciation           665          741 11.4%
Profit before tax        4,617        (828) -117.9%
Tax        1,570        (275) -117.5%
Profit after tax/(loss)        3,047        (553) -118.2%
Net profit margin (%) 5.4% -0.9%  
No. of shares (m)       148.9    
Diluted earnings per share (Rs)*         16.3    
Price to earnings ratio (x)*         15.7    

What has driven performance in 1QFY11?
  • Chennai Petro reported a topline growth of 12% YoY during 1QFY11. It achieved a crude throughput of 2.33 m metric tonnes (MMT) during the quarter, down from 2.69 MMT in 1QFY10. Gross refining margins (GRMs) during 1QFY11 was US$ 1.79 per barrel, down from US$ 6.88 per barrel in 1QFY10.

  • On the expenditure front, raw material costs increased by 21% YoY in 1QFY11 in absolute terms. As a percentage of sales basis, there was an increase of 7.3%.This increase accounted for the decline in the company’s operating margins.

    Cost break up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 50,438 61,034 21.0%
    % sales 89.1% 96.5%  
    Staff cost 450 582 29.2%
    % sales 0.8% 0.9%  
    Other expenditure        1,038       1,480 42.6%
    % sales 1.8% 2.3%  
    Total cost 51,927 63,096 21.5%
    % sales 91.7% 99.7%  

  • Other expenditure includes foreign exchange fluctuation loss of Rs 5,55.4 m during 1QFY11. Foreign exchange fluctuation gain of Rs 805.7 m for 1QFY10 is included in other income.

What to expect?
The stock is currently trading at a price of Rs 257 which works out to a trailing 12-months earnings multiple of 15.7 times. The company has recovered from the extreme fall in the GRMsin 3QFY09 due to inventory losses caused by the speedy decline in petroleum product prices internationally. After reverting to more comfortable levels from that point, they have once again come under pressure. 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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