Chennai Petroleum's Q2FY19 results (Outperformer) - Dissappointing operating performance
Q2FY19 highlights
- Chennai Petroleum (CPCL) reported earnings of Rs270m, -91% yoy (IDFCe Rs1bn). Lower GRMs of US$5/bbl (IDFCe US$5.7/bbl) driven by Lower core margins and higher forex loss of Rs1.9bn dragged earnings
- EBITDA of Rs2.4bn (-62% yoy, IDFCe Rs3.5bn), EBIT of Rs1.4bn (-76% yoy, IDFCe Rs2.4bn. Effective tax rate of 47% for the quarter was also a negative surprise.
- Reported GRMs of US$5/bbl declined US$2.5/bbl yoy (IDFCe US$5.7/bbl) driven by sharply lower core margins (US$3.2/bbl vs IDFCe US$4.2/bbl). However inventory gain of US$1.75/bbl was above estimates of US$1.5/bbl.
- Refining utilisation for Q2 was the one bright spot at 101%, highest in the last 8 qtrs,.
Key positives: high refining utilisation
Key negatives: Core GRMs lower than estimates for the quarter, depreciation rose sharply
Impact on financials: FY19/20E EPS reduced -22/1.4% to factor revised GRM/depreciation/interest cost estimates. TP revised to Rs380/sh.
Valuations & View: the road ahead looks attractive
Despite the disappointment on core margins, we remain optimistic on CPCL’s prospects over the next 18 months. The commissioning of Delayed coker unit, new secondary processing units and DHDS revamp in Feb 2018, and the expected completion of crude pipeline project by July 2018 are expected to materially improve distillate yields and also improve heavy crude mix for the sourcing, reducing input costs over FY20E. Some part of the optimisation is already visible in operating metrics with the highest ever refining thruput of 2.96mt seen in Q2. We expect GRMs to average US$6.6/6.8 per bbl over FY19/20E. With an estimated dividend yield of 5-6% and current valuations implying EV/E of just 3.4x FY20E, we believe valuations are compelling for the stock, despite challenging near term prospects. 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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