Chennai Petroleum Corporation: Needs more refining

The company’s performance remains inconsistent. The stock is pricey too

The stock of standalone refiner Chennai Petroleum Corporation (CPCL) has been on a roller-coaster. After more than tripling from March to October this year, it has shed nearly 25 per cent over the past month. The strong run-up until October was thanks to the struggling company posting two good quarters (March and June 2015) and getting fund infusion of ₹1,000 crore from its parent Indian Oil.

Prior to this, huge losses had sharply eroded CPCL’s net worth, resulting in it reporting to the Board for Industrial and Financial Reconstruction (BIFR). The fresh funds and healthy profits in two quarters improved the company’s financial position and raised expectations of a turnaround in operational performance.

Inventory losses

But the September quarter results declared earlier this month left investors chastened, with CPCL posting a loss of ₹452 crore.

The old bugbear — inventory loss — added to the pain of a relatively weak refining market on a sequential basis, and highlighted the company’s susceptibility to crude oil price fluctuations.

Inventory gains helped in the June quarter, but inventory losses which were a major factor in the losses of fiscals 2014 and 2015, took a toll in the September quarter too. Despite the recent dip, the stock trades nearly 80 per cent higher than a year before. Investors can exit the stock.

One, it is quite pricey. At ₹174, the stock discounts its trailing 12-month earnings by 17 times, far higher than the average eight times it traded at in the past three years. Also, despite the fund infusion and a couple of profitable quarters, the price-to-book at above 0.8 times is higher than the past three-year average (0.7 times).

Long road to improvement

CPCL’s financial position has improved, thanks to the fund infusion — the debt-to-equity ratio has reduced to about 1.5 times in September from more than three times in March. Yet, the inconsistent performance of the company is a dampener.

Crude oil and currency volatility causing inventory and forex losses may continue. Also, with debt levels remaining high, interest cost may stay elevated.

In the September quarter, interest cost rose about 15 per cent compared with the June quarter. Besides, CPCL’s gross refining margin has often been weaker than that of its peers.

The ongoing initiatives, such as the ₹3,110-crore resid upgradation project and the ₹258-crore new 42-inch pipeline, should aid CPCL’s margins by improving distillate yield and reducing demurrage cost.

But it may take until 2018 for these projects to yield benefits.

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