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Weak core performance on narrowing of Russian crude discounts

Our View

Chennai Petroleum’s Q3 FY24 core performance was weak, with an EBITDA of Rs 7.1bn; USD6.2/bbl of reported GRM (our est. USD8.5) on narrowing Russian crude discounts. As per our calculations, there is an inventory gain which could be at USD0.3/bbl due to higher quantity of crude sourced in Aug’23 which was cheaper and had higher discounts. As per our calculations, the RTP reduction of USD2/bbl impacted the core GRMs, otherwise the core GRMs could be at USD 7.9/bbl. We maintain BUY rating, with a revised 12-mth TP of Rs1,030 (Rs1,040 earlier).

Result Highlights

* EBITDA/PAT at Rs bn 7.1/3.9 (up 64%/172% YoY and down 61%/67% QoQ). The performance is lower than our expectation on weaker core GRMs. The reported GRM was USD6.2/bbl (USD12.1 the quarter prior, USD5.7 a year ago). The assumed core GRM at USD5.9/bbl (USD8.1 in Q2FY24, USD9.7 in Q3FY23) was at a premium of USD0.5 to the benchmark of USD5.4. As per our calculations, the RTP reduction of USD2/bbl impacted the core GRMs, otherwise the core GRMs could be at USD 7.9/bbl. As per our calculation, we understand that there were marginal Inventory gains of USD0.3/bbl (Rs0.97bn) which added to the profitability. Higher quantity of crude sourced in Aug’23 which was cheaper and had higher discounts, was there in the system which resulted in inventory gains versus our expectation of an inventory loss.

* Refinery throughput was 2.83mmt at ~107% utilization (115% in the prior quarter, 98.4% a year ago) was lower as it was impacted 5 days by floods in Dec’23. At USD2.5/bbl opex, it was lower than the trailing 12-quarter average of USD2.9.

* Sequentially, the debt increased by Rs13.6bn to Rs47.9bn (vs peak of Rs104bn) despite strong cashflow generation. There was a portion of advance payments for Q2 which were made in Q1 which has now normalized to working capital requirements. The FCF at Rs3.7bn was lower. The capex was Rs1.7bn (Rs 4.52bn in 9MFY24), per PPAC vs FY24 target of Rs 5bn.

* 9MFY24 performance: EBITDA at Rs 34.6bn (vs Rs 40.6bn previous period last year) while PAT at Rs 21.3bn (vs Rs 25.3bn previous period last year) and the reported GRM at USD8.98/bbl (vs USD11.7). The FCF is at Rs 21.3bn (vs Rs 24.9bn in the previous period last year).

Valuation

High GRM sensitivity: a USD1/bbl change in GRM changes EBITDA by Rs 6.9bn. Expected dividend of Rs 25/share in FY24 (2.9% yield), 3.3/2.6% FY25e/26e, would be key for shareholders. The BV/share for FY25e/26e: Rs 704/792, debt on books is towards working capital requirements. At CMP, the stock trades at 3.8x/4.2x FY25e/26e EV/EBITDA and 1.2x/1.1x P/BV. We maintain BUY rating, with a revised 12-mth TP of Rs1,030 (Rs1,040 earlier), valuing the stock at 1.3x FY26e P/BV.

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