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Weak performance hit by shutdown & inventory losses

Chennai Petroleum’s Q2FY25 core performance was a disappointment, EBITDA loss was at Rs 6.7bn; negative USD1.6/bbl of reported GRM (our est. of positive USD2.9) on shutdown and inventory losses. As per our calculations, there is an inventory loss which could be at USD1.8/bbl with no forex impact during the quarter. As per our calculations, the core GRMs could be at USD 0.20/bbl which is much lower than the benchmark of USD3.6/bbl. We maintain BUY rating, with a revised 12-mth TP of Rs1,100.

Result Highlights

* EBITDA/PAT loss at Rs bn 6.7/6.3 (vs positive Rs bn 18/11.9 in Q2FY24 and 6.6/3.4 in Q1FY25). The performance is significantly weaker than our estimate of Rs bn of 0.02/ negative 1.44, while the consensus was at Rs bn 0.26/ negative 1.26. GRMs were impacted by shutdown of one of the phases of refinery and secondary units for whole of Sep’24, the change in inventory in the system also impacted the GRMs.

* CPCL’s Q2FY25 reported GRM was at negative ~USD 1.6/bbl (USD 6.3 the quarter prior, USD 12.1 a year ago) while the Arab heavy-light difference was USD 1.3/bbl (1.5 in the prior quarter). There was no RTP reduction impact, while as per our assumption, there could be an inventory loss of USD1.8/bbl which means that the core GRMs were quite weak and could be at ~USD0.20/bbl.

* Refinery throughput was 2.10mmt at ~79% utilization (107% in the prior quarter, 115% a year ago) was lower than our expectations. Of the three refinery phases, one of them had a shutdown for whole of Sep’24 and 15 days in Oct’24 which impacted the plant utilization. The secondary units – FCCU, DCU were under shutdown further impacting the GRMs at large, if we normalize the same then thecore GRMs could be ~USD3-3.2/bbl.

* Opex: At USD 3.8/bbl opex is USD 1/bbl above the trailing 8-quarter average of USD2.8/bbl as the plant utilization was lower. RLNG consumption during the quarter was ~1mmscmd. There was no forex impact during this quarter.

* Sequentially, the debt increased by Rs 16.8bn to Rs 60.6bn (vs peak of Rs104bn) and by Rs 26.3bn YoY on weaker GRMs. The company expects a Rs 45bn of normal debt levels. Capex for quarter was at Rs 2.4bn, (Rs 3.57bn in H1FY25) and FY25 is targeted at Rs 5bn.

* Crude Sourcing mix: Indigenous contributed 15%, 15% Saudi, 25% Iraq, Russia 33%, and rest 12% on Spot from other countries. The Russian crude discounts were lower (USD2/bbl) as the system for booking of crude price changed from earlier delivery to the Indian port to Russian port dispatch. It takes ~30days for crude to reach Indian port when left Russian port. In terms of the slate mix, the diesel contribution to the slate was ~45%, gasoline ~11%, ATF ~8% and lubes ~2%, fuel & loss 9%. The diesel spreads were more impacted due to shutdowns and inventory changes.

* H1FY25 performance: EBITDA loss at Rs 109mn (vs a profit of Rs 27.5bn in previous period) while PAT loss at Rs 2.9bn (vs a profit of Rs 17.4bn in previous period) and the reported GRM at USD2.9/bbl (vs USD10.3). The OCF is at negative Rs 21.5bn (vs a positive Rs 17.1bn in previous period) on weaker GRMs and plant shutdowns.

Valuation High GRM sensitivity: a USD1/bbl change in GRM changes EBITDA by Rs 7.7bn. Declared dividend of Rs 55/share in FY24 (6.3% dividend yield), 0.5/3.6/2.5% FY25e/26e/27e, would be key for shareholders. The BV/share for FY25e/26e/27e: Rs 587/666/714, debt on books is towards working capital requirements. At CMP, the stock trades at 10.4x/3.7x/5x FY25e/26e/27e EV/EBITDA and 1.5x/1.3x/1.2x P/BV. We maintain BUY rating, with a revised 12-mth TP of Rs1,100, valuing the stock at 7.4x FY27e EV/EBITDA.

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