Buy Chennai Petroleum Corporation Ltd For Target Rs.355 - Anand Rathi Share and Stock Brokers
De-levering to augment shareholder wealth on stronger GRMs; Initiating with a Buy
With operational synergies with parent Indian Oil Corp, the 10.5mtpa Chennai Petro is a pure play on refining. It includes pooled sourcing of crude oil and bulk purchases through the latter (IOC purchases over 90% of its output). The high refining-margin context and robust demand would support Chennai Petroleum’s de-levering to augment shareholder wealth. The company has one of the best core performances in Indian refiners, which has a Nelson complexity of ~10. Falling crude prices and discounted crude sourcing have reduced working capital and eased debt. We initiate coverage with a Buy rating at a target price of Rs355.
Strong core refining performance; continues to be impacted by SEAD. CPC’s Q3 FY23 GRM was$5.7/bbl ($4.4 the previous quarter, $7.25 a year ago) while the Arab heavy-light difference was $3.75/bbl ($3.21 the quarter prior. The core GRM at $9.7/bbl ($8.4 in Q2 FY23, $5.5 in Q3 FY22) was at a premium of $3.4 to the benchmark of $6.3. GRMs were boosted by strong cracks for major products: gasoil $39.4/bbl, ATF $33.8 while gasoline was lower at $5.4. The inventory loss at $4/bbl (Rs6.4bn). There was an impact of export duty which has been reduced in RTP, as per our calculation it could amount to Rs14bn ($7.9/bbl) vs Rs19.1bn ($11.1/bbl) last quarter. This means that the core GRMs could be $17.6/bbl. Refinery throughput was 2.61mmt at ~98.4% utilisation (109% the prior quarter, 81% a year ago, on lower demand during Covid-19 recovery). The $2.7/bbl opex and a Rs935m forex loss impacted profitability. Capex was Rs1.84bn; debt reduced by Rs3.2bn to Rs71.4bn, supported by Rs1bn of FCF.
Outlook, Valuation. The GRM sensitivity for the stock is high: a $1/bbl change in the GRM changes the EPS by Rs32.5. We initiate coverage with a Buy rating and a TP of Rs355, valuing the stock at 0.8x FY25e P/BV
Risks: The lower GRM environment, change in crude prices and inventory losses, adverse government policy – subsidy-sharing, more capex for a new refinery
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