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CPCL: Expansion to benefit

Aug 25, 2003

Chennai Petroleum Corporation (CPCL) announced its 1QFY04 results. The company reported a 4% growth in its topline while the bottomline was up by about 11%. Both refining and marketing companies reported better results during 1QFY04 and have been in the investor's radar. CPCL was a no exception.

(Rs m)1QFY031QFY04Change
Net sales 19,334 20,008 3.5%
Other Income 45 31 -32.1%
Expenditure 18,421 19,076 3.6%
Operating Profit (EBDIT) 914 932 2.0%
Operating Profit Margin (%)4.7%4.7% 
Interest 362 214 -40.8%
Depreciation 277 256 -7.4%
Profit before Tax32049253.6%
Tax 70 214 207.8%
Profit after Tax/(Loss) 251 278 10.8%
Net profit margin (%)1.3%1.4% 
No. of Shares 149.0 149.0  
Diluted earnings per share (Rs)*6.77.5 
P/E Ratio  10.5  

Increase in topline seems mainly on account of higher prices of crude oil as compared to the same period previous year. Though the crude oil prices witnessed a fall as compared to its high of US$ 35 per barrel during March '03, it was higher as compared to 1QFY03 levels. This has translated into higher product prices when compared to 1QFY03, thus benefiting CPCL. However volumes of petroleum products witnessed a decline during 1QFY04 mainly on account of truckers strike.

Expenses increased at the same rate as compared to sales. Consequently, operating margins remained at the same level. Operating margin of CPCL (subsidiary of IOC) is above that of MRPL (2% in 1QFY04) and lower than Kochi Refinery (12.4% in 1QFY04). This might be because MRPL (subsidiary of ONGC) is operating at a lower capacity utilisation as compared to CPCL and KRL (subsidiary of BPCL).

CPCL managed to reduce its interest outgo significantly (down 41%) during the 1QFY04 taking advantages of prevailing lower interest rates. Depreciation also declined during the current quarter and this further aided bottomline growth.

At Rs 78, the stock is trading at a P/E multiple of 10.5x annualised earnings (3.4x FY03 earnings). The higher P/E is on account of first quarter effect and one has to look at whole year owing to the commodity nature of its business. The company is expanding its refinery capacity from current 7.5 MTPA to 10.5 MTPA, which is slated for completion in FY04. This would help it to further increase its topline. This combined with further upside in terms of capacity utilisation would benefit CPCL is terms of higher operating margins. Support from the parent, IOC, for selling of its products will further help it to get protection in the wake of an oversupply scenario in the country.

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