Stock Review: Chennai Petroleum

 

Stable Industry Outlook, Improving Nos May Make It A Value Play

 

CHENNAI Petroleum's net profit in the December quarter was lower than in the year-ago period. This was despite a greatly improved industry outlook. The scrip, which is trading below its book value, didn't react much to the results. The profit fall was mainly due to some extraordinary adjustments of last December. The stable outlook for the refining industry is expected to help the scrip gain lost ground in the coming months.

   Last December, the standalone refiner had posted a huge jump in net profit even as refining margins dipped to a multi-year low. This was mainly on account of a huge . 114 crore tax write-back. As a result, even the improved gross refining margins — the money it earns on refining each barrel of oil — in the December 2010 didn't result in higher profits compared with last December.

   The company, which commands the lowest valuation per tonne of refining capacity in India, has remained range-bound on the bourses in the past 15 months. A crash in its share price in August 2010 in particular resulted in the company underperforming the BSE Sensex.

   However, the December quarter results hold promise of a revival in the company's profitability over the next few quarters. The company reported net losses in the March and June quarters of 2010. A stable outlook for refining industry means over the next couple of quarters, the company may report healthy profits and wipe out the losses. In view of the uncertainties prevailing over the public sector oil companies regarding under-recoveries and subsidy sharing, etc, analysts believe Chennai Petroleum to be a safe play.

   A result update report on the company by Elara Capital, for instance, said: "Apart from the prolonged stagnancy in refining prior to Oct '10, CPCL shares have fallen from . 280 levels due to company-specific issues such as lower utilizations, thus (resulting in) high opex and lower GRMs. However, with the turnaround on both fronts — global refining and higher utilisation — we believe FY12 earnings would be robust." It has given an 'accumulate' rating for the scrip.

   Based on the company's dividends of . 12 per share for FY10, the dividend yield presently works out to 5.4%. However, its profits in the first nine months of FY11 are 70% lower against the corresponding period of last year, which means the dividend rate could diminish.

   The company is also working on several projects to improve its profitability. These include . 2,616-crore auto fuel quality upgradation project, which is in an advanced stage of completion, and a new 42-inch crude oil pipeline from Chennai Port to Manali Refinery at a cost of . 65 crore.

   To increase the distillate yield of the refinery and reduce fuel oil production, CPCL plans to install a Resid Upgradation Unit worth . 3,350 crore by end 2013. A 9 million-tonne brown-field refinery is also on the cards at Manali, replacing the existing 2.8 million-tonne refinery at a cost of . 10,000 crore by end 2015.

   In view of its low valuations, the company could be a sustained value creator in the coming quarters as outlook for the industry improves.

REFINED GROWTH

The December
quarter results hold promise of a revival in the company's profitability over the next few quarters
The co is working
on projects to improve its profitability, including . the . 2,616-cr auto fuel quality upgradation project