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Chennai Petro: Undue pressure on margins - Views on News from Equitymaster

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Chennai Petro: Undue pressure on margins
Oct 22, 2008

Performance summary
  • Topline grows by 62% YoY during 2QFY09.

  • EBITDA margins erode to -0.5% during the quarter, down from 6.8% in 2QFY08 on the back of a crash in gross refining margins (GRMs) to US$ 1.68 per barrel, down from US$ 6.84 per barrel in 2QFY08.

  • Other income declines by 59%.

  • Bottomline turns negative on account of plummeting GRMs and lower other income.

  • Topline and bottomline grow 72% YoY and 8.5% YoY respectively in 1HFY09. GRMs for 1HFY09 were US$ 9.24 per barrel (US$ 7.79 per barrel in 1HFY08)



Standalone financial snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 63,365 102,833 125,582 215,365
Expenditure 59,077 103,367 115,380 204,210
Operating profit (EBDITA) 4,288 (534) 10,202 11,155
EBDITA margin (%)
Other income 386 158 469 260
Interest 561 607 1,021 987
Depreciation 616 637 1,253 1,275
Profit before tax 3,497 (1,619) 8,397 9,152
Tax 1,194 (592) 2,863 3,146
Profit after tax/(loss) 2,303 (1,027) 5,534 6,006
Net profit margin (%)
No. of shares (m)       148.9  
Diluted earnings per share (Rs)*       78.6
Price to earnings ratio (x)*     1.8
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • CPCL reported a topline growth of 62% YoY during 2QFY09. It achieved a crude thruput of 2.2 m metric tones (MMT) during the quarter, down from 2.8 MMT in 2QFY08.

  • Gross refining margins (GRMs) during 2QFY09 crashed to US$ 1.68 per barrel, down from US$ 6.84 per barrel in 2QFY08. GRMs for 1HFY09 were US$ 9.24 per barrel, higher than US$ 7.79 per barrel in 1HFY08. In 1QFY09, the company had reported record GRMs of US$ 15.89 per barrel.

  • On the expenditure front, raw material costs increased by 73% in 2QFY09 in absolute terms. Moreover, on a percentage of sales basis, there was an increase of 5.9%. This increase combined with the rise in other expenditure (both on an absolute as well as percentage of sales basis) hampered the company’s operating margins.

  • Other expenditure includes exchange fluctuation loss of Rs 1.9 bn for 2QFY09 and Rs 3.9 bn for 1HFY09. Exchange fluctuation gain of Rs 264.6 m for 2QFY08 and Rs 986.70 m for 1HFY08 is included in other income.

What to expect?
At the current price of Rs 140, the stock is trading at a multiple of 1.5 times our estimated FY11 earnings. The extreme fall in the GRMs this quarter is because of the speedy decline in petroleum product prices internationally. The company had to process crude inventory acquired at a record high cost into products whose prices fell even as the refining was underway. Hence, we believe the GRMs will reverse going forward and revert to more comfortable levels. As such, the stock looks attractive at current levels from a long-term perspective.

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