Chennai Petroleum (CPCL):Chennai Petro seen well-oiled

Attractive Dividend Yield, Low Valuations Expected To Restrict Downside On Street

THE fourth-quarter results of Chennai Petroleum (CPCL) affected its share price on Tuesday which lost over 1%, while the overall market ended in black. The scrip has outperformed the market, generating nearly 80% returns over the past one year against an 18% gain in the benchmark Sensex.

CPCL’s results for the March ’10 quarter were substantially below market expectations, as the company posted a net loss of Rs 61 crore against a profit of Rs 418 crore in the year-ago period. In line with the market expectations, gross-refining margins increased to $4.27 per barrel during the quarter from $3.44 in the December ’09 quarter, but were lower against $6.6 in the year-ago period. The company also made a forex gain of Rs 51.6 crore against a loss of Rs 47.6 crore in the yearago period.

It was the sharp jump in CPCL’s staff cost that hurt it the most. The company reported a rise of more than eight-folds in its staff cost to Rs 118 crore, which included Rs 64 crore towards prior periods, as the pay revisions were implemented. CPCL’s other expenditure, too, registered a hefty 25.9% jump to Rs 183.6 crore.

The silver lining to the gloom of the results was the dividend declared by the company. CPCL had discontinued its dividend-paying last year, after steadily raising it over a decade due to its first annual loss. For FY10, the company announced a dividend of Rs 12 per share that translates into a dividend yield of 4.8%.

The company has undertaken several capex projects, including 17.5-MW wind power, 20-MW gas-based power plant and seawater desalination, and a revamp of catalytic reforming unit for converting naphtha into petrol.
Besides, it is debottlenecking its refining capacity by 10% to 10.5 MTPA while upgrading refineries to meet the Euro III & IV norms. It also has plans to set up a single-point mooring (SPM) and upgrade refineries to improve product yield by 7-8% by 2012.

Lower profits in the past year while implementing the capex programme have resulted in a quantum jump in CPCL’s outstanding debt. As on March 31, 2010, CPCL had an outstanding debt of Rs 4,078 crore, which was 2.6 times that of last year. The debt-to-equity ratio, too, stood skewed at 1.2 compared to 0.5 last year.
While the scrip has always been a laggard in the oil industry, attractive dividend yield and very low valuations (price-to-book value stands below 1.1) are expected to restrict downside.