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The stock of standalone refiner Chennai Petroleum (CPCL) has zoomed about 32 per cent over the past two trading sessions. Building up on its 20 per cent gain on Monday, the stock shot up another 10 per cent on Tuesday. The market seems relieved with the company finally delivering a good show in the recent March quarter after a prolonged uninspiring run. Weak refining margins, high interest cost, and crude oil and currency volatility resulting in inventory and forex losses caused heavy losses in fiscals 2013 and 2014. This eroded more than half the company’s peak net worth recorded during the preceding four years and its reporting to the BIFR. For much of 2015, especially in the December quarter, the poor run continued.
Given this bleak background, the seven-fold rise in CPCL’s profit (Rs 365 crore) in the March quarter compared with the year-ago period (Rs 50 crore) is a welcome break. In line with buoyant refining market conditions which pushed up the Singapore benchmark in the quarter, CPCL’s gross refining margin increased to $5.85 a barrel in the March quarter compared with $1.96 a barrel a year-ago and a negative $2.23 a barrel in the December quarter. It also helped that inventory loss in the recent March quarter was lower compared with the December quarter.
There were other positive tidings too. News that parent Indian Oil will infuse up to Rs 1,000 crore in CPCL came as a shot in the arm for the beleaguered company. This will help ease the strain on CPCL’s balance sheet; despite the good show in the March quarter, the debt-to-equity ratio remains high at 3.26 times and interest coverage is just a little over 1 time. It will also help CPCL speed up its ongoing initiatives such as the about Rs 3,000 crore resid upgradation project and the ₹250 crore new 42-inch pipeline. These projects which should be completed in the next two to three years are expected to add to CPCL’s distillate yield and reduce its demurrage cost; this, in turn should boost margins. A sustained rise in gross refining margins to levels comparable with those of other players (in the high-single digits) and significant balance-sheet repair is essential for the CPCL stock to sustain its gains.
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