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CPCL: The good show continues - Views on News from Equitymaster
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  • Nov 16, 2004

    CPCL: The good show continues

    Performance summary
    Chennai Petroleum Corporation, the standalone-refining subsidiary of IOC, posted robust 2QFY05 earnings with the topline witnessing a jump of nearly 60% YoY while the bottomline surged by over 174% YoY. At the same time, operating margins have shown a major improvement of 390 basis points YoY.

    What is the company’s business?
    Chennai Petroleum has a combined refining capacity of nearly 10 MMTPA (million tonnes per annum), making it one of the largest and the most flexible refinery in South India. The company produces a wide range of petroleum products ranging from diesel, kerosene, LPG to petrochemical feedstocks such as propylene and naphtha. The company recently completed its refinery modernization cum expansion plans by increasing capacity by 3 MMTPA.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 18,567 29,634 59.6% 38,353 57,827 50.8%
    Expenditure 17,482 26,753 53.0% 36,336 51,682 42.2%
    Operating profit (EBDITA) 1,086 2,881 165.3% 2,018 6,145 204.5%
    EBDITA margin (%) 5.8% 9.7%   5.3% 10.6%  
    Other income 101 62 -39.2% 132 138 4.6%
    Interest 94 324 244.5% 308 586 90.0%
    Depreciation 268 572 113.7% 524 1,028 96.1%
    Profit before tax 825 2,046 148.0% 1,317 4,669 254.5%
    Tax 360 769 113.8% 574 1,758 206.4%
    Profit after tax/(loss) 466 1,278 174.3% 743 2,911 291.6%
    Net profit margin (%) 2.5% 4.3%   1.9% 5.0%  
    No. of shares (m) 148.9 149.0   148.9 149.0  
    Diluted earnings per share (Rs)* 12.5 34.3   10.0 39.1  
    Price to earnings ratio (x)   6.9     6.07  
    (* annualised)            

    What has driven performance in 1QFY05?
    Import parity boom:  Refineries in India have been able to realize import parity prices for the products sold at the refinery gate. Given the current firm international product prices, CPCL has been successful in improving its topline by nearly 60%. High product prices at the refinery gate have filtered into higher refining margins (US$ 5.8 per barrel as against US$ 3.7 per barrel in 2QFY04). Despite the increase in product prices, demand for the same has been on the higher side when compared to the flattish demand over the last few years. To put things in perspective, most refineries operated at over 100% of the rated capacity during the 1HFY05. Thus, coupled with high product prices, higher volumes have also helped shape up a better picture.

    (%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
    Consumption of Raw materials 90.0% 85.7% 90.6% 85.4%
    Staff cost 1.7% 0.7% 1.4% 0.7%
    Other expenditure 2.4% 3.9% 2.8% 3.2%

    Operating margins show improvement:  CPCL was able to improve its operating margins by 390 basis points during 2QFY05 as compared to the corresponding period last fiscal. Higher inventory gains during the current fiscal helped reduce raw material costs, which account for nearly 95% of total expenditure, thereby resulting in higher operating margins

    It all trickles down to the bottomline:  High product prices coupled with a less than proportionate expenditure has helped CPCL to post a strong growth of over 174% YoY in the bottomline. But for the rise in interest and depreciation costs on account of higher debt and capital expenditure, the bottomline could have been further attractive.

    Quarterly trends
      3QFY04 4QFY04 1QFY05 2QFY05
    Sales 22,079 27,004 28,193 29,634
    Op. profit 1,724 3,320 3,264 2,881
    (%) OPM 7.8% 12.3% 11.6% 9.7%
    Net profit 1,053 2,205 1,635 1,278
    (%) NPM 4.8% 8.2% 5.8% 4.3%

    The last four quarters:  The last four quarters have been robust for the company with the firm international products in the backdrop resulting in higher margins. The company witnessed robust growth during the 4QFY04 and 1QFY05 and the decline in operating profit is largely due to the excise duty cuts in product prices having a partial negative impact on the realizations.

    What to expect?
    At Rs 237, the stock is trading at a price to earnings multiple of nearly 7 times annualized 2QFY05 earnings. Given the current high product prices in the international markets and growing demand in the domestic market, CPCL is likely to witness robust margins in the current fiscal. Having said that, any government policies regarding further duty cuts could have a negative impact. Crude oil prices have shown signs of softening during the last few weeks and if this trend continues, product prices shall follow suit and hence affect realizations. As a result, we would advise investors to weigh the upside vis-ŕ-vis the downside.



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