Chennai Petroleum's Q2FY18 results (Outperformer) - Inventory gains support strong earnings
Q2FY18 highlights
- Chennai Petroleum (CPCL) reported earnings of Rs3.1bn, +3x yoy, higher than estimates of Rs2.7bn. Thruput of 2.6mt was in line with estimates albeit yoy volumes were down 10%.
- EBITDA of Rs6.4bn therefore increased 150% yoy, well above estimates of Rs5.2bn.
- Reported GRMs of US$7.5/bbl was up 120% yoy, higher than estimates of US$7/bbl. Core GRMs of US$5.85/bbl improved US$1.8/bbl yoy but were lower than estimates of US$6.2/bbl. Inventory gain of US$1.6/bbl was higher than estimates of US$0.8/bbl.
- Refining utilisation for Q1 at 92%, marginally higher than Q1FY18 utilisation of 90%. H1FY18 thruput at 5.2mt, implying average utilisation of 91%.
Key positives: Higher core GRMs yoy/qoq, lower opex/bbl
Key negatives: Core GRMs a tad lower than estimates for the quarter
Impact on financials: FY18/19E EPS tweaked +4.5/-3.2% to factor revised thruput/GRM estimates. TP revised to Rs510/sh. We introduce FY20E EPS of Rs91.5/sh with this note.
Valuations & View: the road ahead looks attractive
We remain sanguine on CPCL’s prospects over the next 18 months. CPCL we believe will see the benefits of robust refining utilisation and improving GRMs coupled with the residual upgrade/revamp of secondary units over FY18E to reflect in higher earnings trajectory over FY18-20E. We believe that the company is seeing a steady improvement in distillate yields and will also improve the heavy crude mix in their sourcing portfolio. The steady improvement in refining environment implies FY18-20E GRMs would range between US$6.4-7.5/bbl, up sharply from US$5.5/bbl average over FY12-17. The Rs31bn residual upgrade, the crude pipeline replacement and the DHDS unit revamp are estimated to add incremental US$0.5-0.6/bbl to GRMs over FY18/19E, supporting estimates of a 16% CAGR in earnings over FY18-20E. At CMP stock trades at attractive multiples of 5.7x FY19E EPS/5.1x EV/EBITDA. Reiterate Outperformer.
Chennai Petroleum Corporation Limited. Chennai Petroleum Corporation Limited (CPCL) is a holding company. The Company operates in downstream petroleum sector. CPCL has approximately two refineries with a combined refining capacity of over 11.5 million tons per annum (MMTPA). The Manali Refinery has a capacity of approximately 10.5 MMTPA and is a refinery with fuel, lube, wax and petrochemical feedstocks production facilities. CPCL's second refinery is located at Cauvery Basin at Nagapattinam, which was set up in Nagapattinam with a capacity of approximately 0.5 MMTPA and later enhanced to 1.0 MMTPA. The main products of the Company are LPG, Motor Spirit, Superior Kerosene, Aviation Turbine Fuel, High Speed Diesel, Naphtha, Bitumen, Lube Base Stocks, Paraffin Wax, Fuel Oil, Hexane and Petrochemical feed stocks. The Wax Plant at CPCL has an installed capacity of over 30,000 tons per annum, which is designed to produce paraffin wax for manufacture of candle wax, waterproof formulations and match wax.
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