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Chennai Petro: On a different trajectory

Aug 6, 2004

Introduction to results
Post announcement of its 1QFY05 results, Chennai Petroleum (CPCL) has witnessed a major upswing in its stock price. In this article let us have a look at the same. During the quarter, the topline improved by 43% YoY backed by strong realizations while the bottomline improved by an impressive 490% YoY.

What is the company’s business?
CPCL is a pure refining subsidiary of IOC (Indian Oil Corp.). It has two refining complexes with a combined refining capacity of 10.5 MMTPA (million tonnes per annum). The refining is one of the most complex and flexible refineries with a wide product range such as diesel, kerosene, LPG (liquefied petroleum gas), ATF (aviation turbine fuel) and bitumen. Further, the company also has a presence in propylene, naphtha and other such high value products.

(Rs m) 1QFY04 1QFY05 Change
Net sales 19,786 28,193 42.5%
Other income 31 76 148.9%
Expenditure 18,854 24,929 32.2%
Operating profit (EBDITA) 932 3,264 250.3%
Operating profit margin (%) 4.7% 11.6%  
Interest 214 262 22.3%
Depreciation 257 456 77.5%
Profit before tax 491 2,623 433.6%
Tax 214 988 361.0%
Profit after tax/(loss) 277 1,635 489.7%
Net profit margin (%) 1.4% 5.8%  
No. of shares (m) 149.0 149.0  
Diluted earnings per share (Rs)* 7.4 43.9  
P/E ratio (x)   3.5  
(* annualised)      

What has driven performance in 1QFY05?
Sales: Topline growth of 43% is mainly driven by strong realizations on account of firm product prices in the international markets. Further, the company was able to increase its throughput by 11% resulting in higher volumes. Focus on high value add products have driven gross refining margins (GRMs) to US$ 6 per barrel as compared to US$ 2.6 per barrel in the corresponding quarter last fiscal. Also, the company witnessed higher offtake on account of a surge in demand for petrol and diesel.

Expenditure Table
(%) of sales 1QFY04 1QFY05
Raw materials consumed 91.1% 85.2%
Staff cost 1.1% 0.7%
Other expenditure 3.1% 2.5%

Operating margins: Operating margins have improved by a robust 690 basis points on account of a 590 basis points dip in raw material costs as a result of inventory gains. Further, the company has also been able to control staff and other expenditure. Also higher realizations boosted income as a result of import parity prices being paid to the refineries at the refinery gate.

Net profit: CPCL’s bottomline has improved by 490% YoY as compared to the corresponding quarter last fiscal. The profits could have been further up but for the 78% jump in depreciation and a six fold increase in tax provisioning.

Over the last four quarters: Over the last 4 quarters, CPCL has witnessed a volatile business environment with sales picking up after the 3QFY04 when the country witnessed a rise in diesel and petrol consumption. Being a subsidiary of IOC, the company witnessed a surge in product offtake and the recent hike in international product prices has resulted in a phenomenal rise in margins growth.

What to expect?
CPCL is currently trading at Rs 153, implying a P/E multiple of 3.5x annualized 1QFY05 results. Being a subsidiary of the country’s largest oil marketing company assures volumes to CPCL. Further, the company recently undertook modernization cum expansion plans at its Manali refinery and has added a ‘once-through’ hydrocracker which would enable CPCL to produce high value add products, further boosting the revenues. Current firmness in international product prices would enable the company maintain its high margins. However, going forward, we believe that the margins are likely to reduce on account of the government’s indication that in case prices move further up beyond the prescribed band, duties might be cut, resulting in lower realizations on products at the refinery gate.

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