Chennai Petroleum's Q4FY18 results (Outperformer) - Lower inventory gains drag earnings
Q4FY18 highlights
- Chennai Petroleum (CPCL) reported earnings of Rs1.8bn, +4% yoy (IDFCe Rs3bn)., Higher refining volumes of 2.8mt (IDFCe 2.7mt) was offset by lower inventory gains of US$0.7/bbl (IDFCe US$2.6/bbl) as well as higher depreciation costs of Rs1.1bn (IDFCe Rs850mn).
- EBITDA of Rs3.5bn (+41% yoy, IDFCe Rs6bn) was further impacted by forex loss of Rs774mn in Q4, vs gain of Rs650mn in Q4FY17
- Reported GRMs of US$5.7/bbl declined US$1.3/bbl yoy (IDFCe US$7.3/bbl) driven by lower inventory gains (US$0.7/bbl vcs Q4FY17 gain of US$1.8/bbl) and lower core margins of US$5.1/bbl (Q4FY17 core margins at US$5.2/bbl)
- Refining utilisation for Q1 at 98%, highest in the last 6 qtrs. FY18 thruput at 10.8mt, implying average utilisation of 94%, highest in last 10 years.
Key positives: Strong refining thruput, reported GRMs for FY18 highest since FY08
Key negatives: Core GRMs lower than estimates for the quarter, depreciation rose sharply
Impact on financials: FY19/20E EPS reduced -12.5/-13% to factor revised GRM/depreciation/interest cost estimates. TP revised to Rs525/sh.
Valuations & View: the road ahead looks attractive
We remain sanguine on CPCL’s prospects over the next 18 months. The commissioning of Delayed coker unit in 3QFY18, followed by new secondary processing units and DHDS revamp in Feb 2018, coupled with 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 FY19-20E. Some part of the optimisation is already visible in operating metrics with the highest ever refining thruput of 10.8mt and distillate yield of 73.2% seen in FY18. We expect GRMs to average US$6.8/7.2 per bbl over FY19/20E for the company supporting assumptions of a robust 14% CAGR in EPS over FY18-20E. With Company maintaining dividend yield of ~6% and current valuations implying EV/E of just 4x FY19E, we believe valuations are compelling for the stock. Reiterate outperformer.
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