Stock Fundamentals

CPCL: SELL

Anand Kalyanaraman | Updated on November 19, 2014 Published on October 12, 2014

Cloudy outlook: A subdued refining market could impact profits

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An improvement in the company’s fortunes seems at least two to three years away



Similar to many of its state-controlled oil and gas peers, Chennai Petroleum Corporation (CPCL) has been on a tear at the bourses this year. The CPCL stock has gained more than 80 per cent since February end. But unlike other public sector hydrocarbon scrips — in which the rally has been supported by improvement in business prospects — the CPCL stock’s run-up is not backed by fundamentals.

Poor show

The company has been posting big losses for the past two fiscal years due to weak gross refining margins, shutdowns, high interest cost, and crude oil and currency volatility causing inventory and forex losses. This resulted in erosion of more than 50 per cent of its peak net worth recorded during the preceding four years and subsequent reporting to the BIFR.

Borrowings to fund ongoing projects resulted in CPCL’s debt-to-equity level rising to 3.5 times as on March 2014 compared with 2.9 times a year ago.

The interest service coverage ratio was just above one time in 2013-2014. The June quarter show too did not inspire confidence with losses at the operating level and a big deferred tax credit salvaging the show at the net level.

Weak prospects

CPCL’s performance is likely to remain weak in the near-to-medium term. Subdued refining market conditions, possible inventory losses from the fall in crude oil prices, and interest costs could eat into profits. Debt levels are unlikely to reduce in a hurry.

It does not help that the company’s naphtha sales are likely to be impacted, with its customers Madras Fertilizers and SPIC stopping urea production due to non-receipt of subsidy from the government. There are moves to restart the subsidy but the outcome is uncertain.

CPCL is undertaking cost-control measures to support the bottom-line. But a change in fortunes looks at least two to three years away when the company’s ongoing initiatives such as the ₹3,110-crore resid upgradation project and the ₹257-crore new 42-inch pipeline are expected to be completed.

The resid upgradation plant is expected to improve CPCL’s distillate yield and the new pipeline will reduce demurrage cost.

These projects could add about $2 a barrel to the gross refining margin, which in the preceding June and March quarters was under $2 a barrel — lower than the $4-$5 of earlier periods and lesser than the margins of most peers.

Investors can capitalise on the sharp run-up in the CPCL stock to exit their holdings. At ₹104, the stock’s enterprise value discounts its trailing 12-month operating profits by a high 9.8 times.

Its price-to-book ratio at 0.9 times is higher than the past three year average (0.6 times).

Published on October 12, 2014

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