With the rise in crude prices but without a proportionate increase in the product prices, Benchmark Singapore refining margins have further corrected to US$5.8/bbl (~11% lower than average of FY18 GRMs).
There will be double whammy on pure refining companies like CPCL due to fall in refining margins, and higher operating cost. Also, higher working capital requirement due to higher crude oil prices will result in increased finance cost. This will impact their operating performance going forward, we opine. We are optimistic on Brent crude oil prices and expect it to remain at elevated levels due to geopolitical concerns.
In order to reflect lower refining margins and other minor changes, we lower our earnings estimates of FY19E and FY20E. We now expect CPCL to report an EPS of Rs.68.2/share (earlier Rs.70.4/share) in FY19E, and an EPS of Rs.71.0 in FY20E (earlier Rs.82.5/share). We expect CPCL to benefit from the recent commissioning of residual up-gradation project/secondary units (delayed coker, sulphur recovery, hydro-cracker) that would improve its high margin distillate yields. Additionally, the company has undertaken few other projects aimed at capacity expansion, production of value added products, and quality up-gradation which will improve its performance.
Post 30% correction in the stock prices in the recent past, we believe lot of the concerns have already been priced in. Hence, we now upgrade our recommendation to BUY (earlier ACCUMULATE) on the stock with a revised price target of Rs.390/share (earlier Rs. 495/share). We believe at CMP, that the stock is attractively valued. We have valued CPCL based on lower PE multiple of 5.5x FY20 (target PE), which is at a significant discount to its peers considering complexity of its refinery.
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