The Hindu Business Line : Strong refinery margins drive Chennai Petro stock

STRONG refinery margins are said to be driving market interest in standalone refinery stocks and in particular Chennai Petroleum Corporation Ltd (CPCL).

Brokers said market perception is that given the company has completed its Capex, it is looking at higher margins on higher volume. The stock of CPCL, has appreciated by almost 25 per cent from around Rs 159 levels as on September 1, 2004 to its current levels on Wednesday.

The cumulative refining capacity of the company currently stands at 10.5 mmtpa, making it the largest in South India. In March 2001, the Government had sold its entire stake to Indian Oil Corporation (IOC) at Rs 65.90 per share. With IOC as parent, the key benefit to CPCL is product offtake.

While firm crude prices have no doubt influenced market interest in the counter, interest is also touted as due to the dividend yield play.

Analysts maintain that despite the import duty cut, the company had, in September, strong refinery margins of $6. "If there had been no duty cut they would have been looking at refinery margins of around $7-$8," said a senior analyst tracking the company.

Going forward, the bullish stand on gross refinery margins is backed by rising Asian oil demand, no new Greenfield capacity until 2007 and the rollout of new fuel standards, which could temporarily remove capacity from an already tight market.

"We expect refinery margins to rule around $6 per barrel i.e. keeping in mind the global and regional refinery margins. Hence the company should be looking at much higher earnings," speculated an analyst with a leading domestic brokerage.

Analysts are therefore convinced that CPCL should post an EPS of Rs 42 and that it is looking at a dividend of Rs 14 for the full year.

However, marketmen say the stock at the current level, is fairly priced.

The stock ended the day at Rs 199.45, up 1.79 per cent, with around 5.8 lakh shares traded on the BSE.

On the NSE, it ended at Rs 199.50, up 2.05 per cent, with around 21.47 lakh shares traded.

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