Chennai Petroleum: The worst may be over for Chennai Petroleum

Stable Outlook, Improving Numbers Make It A Safe Bet

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 and the scrip, which is trading below its book value, didn’t react much to the results.
The stable outlook for the refining industry is expected to help the scrip gain lost ground. The profit fall was mainly due to some extraordinary adjustments of last December. The standalone refiner had then posted a huge jump in net profit even though refining margins dipped to a multiyear low. This was mainly on account of a huge . 114 crore tax write-back. As a result, even with improved gross refining margins — the money it earns on refining each barrel of oil — the company did not report higher profits in the December 2010 quarter compared with the year-ago period.
The company, which has the lowest valuation per tonne of refining capacity in India, has been range-bound on the bourses for 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 the 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 underrecoveries and subsidy sharing, etc, analysts are betting on Chennai Petroleum being 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 utilisations. However, with the turnaround in 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 works out to 5.4%. However, its profits in the first nine months of FY11 are 70% lower than in the corresponding period last year. Hence, the dividend rate could diminish.
The company is 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 . 65-crore, 42-inch crude oil pipeline from Chennai Port to Manali Refinery. To increase the distillate yield of the refinery and reduce fuel oil production, CPCL plans to install a . 3,350-crore residue upgradation unit by end 2013. A 9 million-tonne brown-field refinery is also on the cards at Manali, to replace the 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.