• JUNE 2, 2003

Chennai Petroleum: The IOC effect

Chennai Petroleum, the standalone refinery, has recently announced its fourth quarter and full year financial results for FY03. As we have noticed in recent times, most refineries have posted encouraging results for FY03 and have been one of the favorites on the bourses. Chennai Petroleum's performance is no exception. Let's take a look.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net Sales 15,072 23,633 56.8% 60,477 80,552 33.2%
Other Income 244 199 -18.4% 395 404 2.4%
Expenditure 13,907 19,657 41.3% 57,911 73,989 27.8%
Operating Profit (EBDIT) 1,165 3,976 241.3% 2,566 6,562 155.8%
Operating Profit Margin (%) 7.7% 16.8%   4.2% 8.1%  
Interest 336 211 -37.2% 1,281 1,067 -16.7%
Depreciation 45 307 576.6% 790 1,020 29.1%
Profit before Tax 1,028 3,657 255.8% 889 4,880 448.9%
Tax 233 1,404 502.9% 252 1,851 635.0%
Profit after Tax/(Loss) 795 2,253 183.5% 637 3,029 375.4%
Net profit margin (%) 5.3% 9.5%   1.1% 3.8%  
No. of Shares 149.0 149.0   149.0 149.0  
Diluted Earnings per share* 21.3 60.5   4.3 20.3  
P/E Ratio         2.8  

In FY02 the topline of the company had declined by 13%. This was on account of slowdown observed across the globe and also due to softening crude prices. However in FY03, the company posted a 33% jump in topline backed by higher volumes and strengthening petroleum product prices. The pricing deregulation which happened last year, led to aligning of domestic petroleum product prices to international crude prices. Improvement in net sales was even higher in fourth quarter (up 56%).

Operating margins of the company almost doubled in FY03. Though the expenses of the company grew by about 28%, the increase was slower as compared to the growth in the net sales. The things become clear when one looks at the raw material costs as a percentage of sales. The raw material cost, which accounts for about 94% of the expenses, has declined as a percentage of sales (see table). However, other expenses increased in FY03 on account of planned shut down of the refinery and the cracker in the second quarter of FY03.

Cost as % of net sales 4QFY02 4QFY03 FY02 FY03
Stock in trade 3.0% -3.0% -0.4% 2.2%
Raw material 85.7% 81.4% 92.6% 90.0%
Staff costs 1.0% 1.0% 1.1% 1.1%
Other expenses 2.6% 3.7% 2.5% 3.0%

Despite a significant 635% increase in tax provisioning, the doubling of operating margins insured bottomline growth by a huge 375% YoY. Chennai Petro managed to reduce the interest costs and this added to further upside in the bottomline. The increase in net profit is also on account of significant improvement in refining margins and also due to gains on the stocks in hand (on account of higher prevailing prices). About 75% of the net profit has been realized in fourth quarter alone.

At Rs 56, the stock is trading at a P/E multiple of 2.8x FY03 earnings. The scrip usually trades within a brand of 3x-6x. Currently the scrip is trading on a lower P/E multiple. The board has recommended a dividend of about 35% for the year ended FY03 as compared to 20% last year. The company is a subsidiary of IOC, the leading player in the marketing segment and hence it is safe as far as its product sales are considered. With the crude expected to remain at a higher level of US$ 25, the company may further benefit going forward.

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