Chennai Petroleum Corporation Ltd.

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Initiating Coverage
Chennai Petroleum Corporation Ltd.

March 14, 2022

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 Chennai Petroleum Corporation Ltd.

Time
Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value
Horizon
Refineries/Petro Product Rs. 124.20 Buy in the Rs. 122-126 band & add more on dips to Rs. 108-112 band Rs. 138 Rs. 151 2 quarters

HDFC Scrip Code CHEPETEQNR Our Take:

BSE Code 500110 Chennai Petroleum Corporation Ltd. (CPCL) has current refining capacity of 10.5 million tonne per annum (mtpa) at Manali. The company
NSE Code CHENPETRO produces petroleum products, lubricants, and additives. CPCL also provides high-quality feedstock such as propylene, superior kerosene,
Bloomberg MRL IN butylenes, naphtha, paraffin wax, and sulphur to other industries. CPCL has a high Nelson complexity index (NCI) of 9.5 (refineries with high
CMP March 11, 2022 Rs. 124.2 NCI have the necessary flexibility to process a variety of crude oils and can record high value addition). However this compares to 12.2 of
Equity Capital (Rs Cr) 148.9 Paradip refinery of IOC and 11.3 and 14.4 for two refineries of Reliance Inds.
Face Value (Rs) 10.0
Equity Share O/S (Cr) 14.9 Compared to other refiners CPCL maintains an extra 20-25 days inventory of crude oil as its plant is located on the east coast. This leads to
Market Cap (Rs Cr) 1849.5 higher inventory gains/losses for the company compared to the other refiners.
Book Value (Rs) 123.7
Avg. 52 Wk Volumes 885261 Energy and oil demand have picked up significantly in 2021 after the massive drop in 2020. Oil demand could grow sharply in the next few
52 Week High 151.8 years as economies recover from the pandemic. Thus, OPEC expects global oil demand is likely to rise by 1.7 million barrels per day in 2023
52 Week Low 93.0 to 101.6 million bpd, adding to robust growth already predicted for 2022, and pushing demand back above the pre-pandemic 2019 rate. To
support future growth, CPCL plans for refinery up-gradation and capacity expansion. In order to upgrade its technology, meet BS-VI norms
Share holding Pattern % (Dec, 2021) and to meet the future fuel demand, it plans a new refinery along with a Polypropylene facility. The company plans to expand its refining
Promoters 67.3 capacity which will boost its earnings in the long term. The company has already received approval from the NITI Aayog for implementation
Institutions 8.5 of the Cauvery Basin Refinery (CBR).
Non Institutions 24.2
Total 100.0 Valuation & Recommendation:
CPCL is largest refinery in south India with a total installed capacity of 10.5 MTPA. Considering the strategic importance of CPCL’s refinery
in the southern India, expansion plan and strong promoter back ground, we believe the financial performance could improve in the medium
term. CPCL’s ongoing enhancement projects and expectation of sustained bounce back in GRM could lead to strong earning visibility and
RoE improvement going forward. In FY21 lower demand for crude oil and petroleum products impacted the prices and refining margins of
the company.
* Refer at the end for explanation on Risk Ratings
Refining fundamentals remain robust. The Singapore GRM - a gauge of regional refining margins - rose to $6.1 per barrel in the December
Fundamental Research Analyst
quarter, a two-year high. Robust demand in H2CY22 is likely to drive global utilisation above 2016-18 levels driving it back to US$7-8/bbl
Abdul Karim
[email protected] range sustainably. OPEC’s forecast for 2022 oil demand indicates 102.2mn bpd demand in Q32022. This has potential to more than restore
refining demand – supply balance.

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 Chennai Petroleum Corporation Ltd.
Taking its lower size, NCI (Nelson complexity Index) and volatile refining margin profile, the stock is trading at lower valuation than other
refiners. Expectations of strong revenue growth and margins expansion, combined with healthy RoE make a case for higher multiple.
Investors could buy the stock in the Rs 122-126 band and add more on dips to Rs. 108-112 band (3.5x FY24E EPS). Base case fair value of
the stock is Rs 138 (4.4x FY24E EPS) and the bull case fair value of the stock is Rs 151 (4.8x FY24E EPS) over the next 2 quarters. At the
CMP of Rs 124.2 the stock trades at 4x FY24E EPS.

Financial Summary (Consolidated)

Particulars (Rs cr) Q3FY22 Q3FY21 YoY (%) Q2FY22 QoQ (%) FY20 FY21 FY22E FY23E FY24E
Total Operating Income 9939 5892 68.7 8856 12.2 37,117 22,445 33,205 32,682 35,928
EBITDA 546 210 159.5 306 78.5 -2,213 2,011 1,370 1,354 1,517
Depreciation 132 113 16.5 122 8.6 468 466 509 512 523
Other Income 4 43 -90.5 4 11.2 100 127 29 38 41
Interest Cost 113 77 47.2 103 10.0 413 375 427 412 404
Tax 73 609 -88.1 24 201.9 -938 1,039 120 122 164
RPAT 232 -546 -142.5 61 280.7 -2,056 257 342 346 467
APAT 232 -546 -142.5 61 280.7 -2,056 257 342 346 467
Diluted EPS (Rs) 15.6 -36.7 -142.5 4.1 280.7 -138.1 17.3 23.0 23.2 31.4
RoE-% -85.4 17.3 19.4 16.7 19.1
P/E (x) -0.9 7.2 5.4 5.3 4.0
EV/EBITDA -4.8 5.2 7.3 7.0 6.1
(Source: Company, HDFC sec)

Q3FY22 Result Update

 CPCL reported better performance in Q3FY22, consolidated net revenue grew by 68.7% YoY to Rs 9939 crore. The company’s EBITDA
increased to Rs 546 crore vs. Rs 210 crore in Q3FY21 and EBITDA margin was at 5.5% in Q3FY22 vs. 3.6% in Q3FY21.
 CPCL’s net profit stood at 232 crore in Q3FY22, while the company has reported net loss of Rs 546 crore in Q3FY21. In Q3FY21, the
company had made some provision for moving to lower tax regime.
 Its crude throughput stood at 2.156 MMT in Q3FY22, as against 2.221 MMT in Q3FY21.
 CPCL‘s Gross Refining Margin (GRM) was at US$ 4.13/bbl and core GRM stood at US$ 1.6/bbl. The average GRM in 9MFY22 was at
US$ 6.28/bbl as against US$ 7.50/bbl in 9MFY21.

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Recent Triggers
CPCL to set up 9 MMTPA grass root refinery at Nagapattinam
CPCL has commenced works for setting up of 9 MMTPA grass root refinery project involving an investment of Rs 28,980 crore at
Nagapattinam in Tamilnadu, through a Joint Venture (JV) with IOC. A one MMTPA plant with a feeder facility is already functional at
Narimanam village of Nagapattinam known as ‘Nagapattinam Refinery’ or ‘Kaveri refinery’. The 9 MMTPA project is planned to be completed
in 45 months’ time. Fund will be raised through the mix of debt and equity at 2:1. CPCL and IOC together will hold 50% stake (i.e. 25% each
in the JV) and balance 50% to be held by a Financial/Strategic/Public investors. IOC with its subsidiary CPCL operates a small 1mmtpa refining
unit at Nagapattinam. IOC plans to dismantle the refining unit and set up a greenfield refinery unit at a total capex of Rs315 bn, an estimated
Rs39.4 bn/mmt. The project is likely to complete by FY26.
CPCL has received environmental clearance from MoEF&CC and Tamil Nadu Government has handed over the order for the acquisition of
606 acres of land parcel adjoining the existing refinery site. Procurement and Engineering activities for the project have already commenced
and site activities will now gain momentum.
CPCL subsequently awarded contracts amounting to Rs 1,538 crore to project management consultants Engineers India (EIL), McDermott
and Tata Consulting Engineers (TCE). The project will act as a catalyst for development of downstream petrochemical and ancillary industries.

Expectation in GRM recovery going forward

The global demand needs to reach pre-pandemic levels in order to hit the pre-pandemic utilisation rates necessary for a revival in refining
margins to the cyclical average. We expect that the demand for global petroleum products to reach the pre-pandemic levels in 2022. The
GRMs are expected to improve from the current levels and the pace of global refined products demand recovery is key to GRM outlook.
Ongoing vaccination as well as booster program across the world has reduced the impact of Omicron, a new variant of COVID. We expect
demand recovery from large oil-consuming markets in particular could be on track in coming months.
Benchmark Singapore GRMs were at US$ 6.1/bbl in Q3FY22, US$3.8/bbl in Q2FY22 vs. US$2.1/bbl in Q1FY22 mainly due to recovery in fuel
oil cracks. Overall, we saw recovery in core GRMs for refiners. Strong refining margins could continue going forward and the likely inventory
gains arising from increasing oil prices should offset the moderate marketing margins of Indian oil marketing companies (OMCs) and continue
to support their stand-alone credit profiles (SCP).
CPCL reported an overall GRM of $7.14/bbl for fiscal 2021, as compared to negative $1.18/bbl for fiscal 2020, mainly driven by the inventory
gains earned with the crude oil prices recovering to its pre-pandemic levels. While the pandemic induced demand disruption impacted the
GRMs during the first half of fiscal 2021, there has been a subsequent improvement in overall GRMs with revival in throughput levels. In
FY22 so far, a gradual recovery has seen and is expected to improve operating performance with revival in economy as well as rising
consumption post the second wave of Covid-19 pandemic.

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CPCL GRM and Singapore GRM-US$/bbl

Long term Triggers

Strong operational, managerial, and financial support from parent
IOCL is holding 51.9% stake in CPCL, as on 31 Dec, 2021. CPCL remains strategically important to IOCL, as CPCL fulfills product requirements
for the South Indian market. The parent has strong representation on CPCL’s board, including a common chairman. The company derives
operational synergies as IOCL is also in the same business; the synergies include pooled sourcing of crude oil through IOCL, and benefits
from the parent’s bulk purchase.

Besides, IOCL buys over 90% of CPCL’s output and the CPCL caters to the parent’s product requirement in South India. CPCL’s sales volumes
are therefore not likely to be affected by the presence of any new refinery comes in the southern region. The company’s association with
IOCL enhances financial flexibility as it is viewed at par with its parent. Thus, CPCL has advantage related to pricing of debt facilities, and
favorable credit terms.

CPCL’s various developments over the recent past to strengthen the operating performance
Significant developments over the recent past
 Floated major tenders like DCU LSTK, BOO- Desalination and Gas Turbine / HRSG Packages.
 Floated tender for long lead items like CDU/VDU column, Desalter, Vacuum Ejector, Compressors Package, Reactors package.
 Also floated Site enabling tenders like Boundary Wall Construction, Site Grading and Piling works.

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Fuels
 CPCL has taken several projects and schemes to produce Petrol and Diesel with compliance to BS-VI grade and CPCL Manali refinery is
supplying BS-VI complaint Petrol and Diesel since 1st December 2019.
 The existing BS-IV grade of auto fuel contains Sulphur less than 50 ppm and the BS VI grade contains only 10 ppm Sulphur. Also, with
the implementation of BS-VI grade fuel, emissions levels are expected to reduce significantly.
 As a part of Nation’s vision towards Environment protection, the auto fuel policy has envisaged BS-VI grade fuel to the market effective
from 1st April 2020.

Lubes
 CPCL produces five grades of Group-I High Viscosity Index (HVI) Lube Oil Base Stock products and two grades of Extracts (500N & BN).
Various grades of Wax are produced from CPCL (Type-II,IIA,III).

Sound financial profile

 CPCL’s operating performance as well as the financial profile had weakened with the heavy inventory losses incurred in the Q4FY20,
performance rebound in FY21 largely supported by the inventory gains realised with a revival in crude oil prices.
 CPCL, on a consolidated basis, reported total net operating income of Rs. 26,962 crore in 9MFY22 as against Rs. 13708 crore in
9MFY21, revenue is likely grow FY21-24E CAGR of 19%. Better profitability could help to report healthy returns going forward.
 The oil & gas industry is a capital-intensive industry, which requires large funds and substantial time to develop a sound
infrastructure.
 Interest coverage ratio also remained comfortable at 5.4x in FY21 vs. 6.4x in FY20. We expect it could go down at 3.6x and 3x in
FY23E and FY24E, respectively.
 Net borrowings had increased to Rs 8,674 crore as on March 31, 2021, from Rs 8,685 crore a year ago, primarily to fund the working
capital requirement due to heightened volatility in the crude oil prices. Over the medium term, with the gradual revival in economy,
improvement in operating performance should reduce the dependence on working capital borrowings. However, liquidity is largely
supported by CPCL’s status as a subsidiary of IOCL.
 IOCL infused Rs 1,000 crore in fiscal 2016 through subscription of non-convertible, cumulative and redeemable preference shares to
support CPCL’s capital needs; these shares have been treated as debt. CPCL redeemed Rs 500 crore of these shares in June 2018.
There are debt repayments of around Rs 498 crore and Rs 1,145 crore due in FY22E and FY23E respectively, which could partially be
refinanced.
 Compared to other refiners CPCL maintains an extra 20-25 days inventory of crude oil as its plant is located on the east coast. This
leads to higher inventory gains/losses for the company compared to the other refiners.

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 Chennai Petroleum Corporation Ltd.
Debt/Equity (x)

(Source: Company, HDFC sec)

What could go wrong?

 Economic slowdown, volatility in oil and gas prices and regulatory changes in Oil and Gas industry could impact its growth story in
the future. The changing macro-economic scenario can have an impact on the growth plans of the company.
 Given the volatility in Crude oil and petroleum product prices, inventory gains/losses in each quarter can be large affecting the
estimates. Any decrease in the price of the crude oil may hamper the profitability of the company. Prices of crude oil depend on
various factors including policies by major producers of crude oil, global as well as regional demand variations, geopolitical situations
and market sentiment.
 The drop in GRM can be attributed to a slowdown in fuel consumption and rise in supply of refined products in the global market. A
lower GRM means refiners earn less for processing every barrel of crude.
 Any adverse government policy impacting refineries like subsidy sharing etc could impact its profitability. However, we believe going
forward the Oil sector could see much more freedom than in the past.
 CPCL currently imports most of its crude oil requirement from the Middle East. Large import dependence also exposes CPCL to
volatility in foreign exchange rates.
 CPCL has not been paying dividend over the last four years and it profitability has been volatile over the period. Further, the company
has not announced any plans to pay any dividend for FY22E.
 Due to stiff resistance from farmers and political parties, CPCL’s future project could be hampered and it could get delayed. Any delay
in project execution may result in cost and time over-run.

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 Chennai Petroleum Corporation Ltd.
Company Profile
Chennai Petroleum Corporation Ltd. (CPCL) is one of the leading PSU refining company in India with one of the most complex refineries of
its kind in the country, producing an array of value-added petroleum products. CPCL currently operates a 10.5-mmtpa refinery in Manali,
near Chennai. Being a stand-alone refinery, CPCL’s products, barring a few industrial feedstock and fuels, have always been sold by oil
marketing companies.
IOC with its subsidiary CPCL operates a small 1mmtpa refining unit at Nagapattinam. IOC plans to dismantle the refining unit and set up a
greenfield refinery unit at a total capex of Rs 315 bn, an estimated Rs 39.4 bn/mmt. The project is likely to complete by FY26. CPCL will
hold 25% stake in this JV, with IOC holding another 25% and the balance 50% with strategic/financial partners. CPCL may have to contribute
Rs.2500 cr as its contribution.
The refinery is one of the most complex and integrated refineries in India with three Crude Distillation Units (CDU/VDUs), Hydrogen
Generation Units (HGUs), Hydro-Cracker unit (HCU), Fluid Catalytic Cracking unit (FCCU), Continuous Catalytic Reforming unit (CCRU),
Isomerisation unit, Delayed Coker Unit (DCU), Visbreaker unit (VBU), Diesel Hydro De-sulphurisation unit (DHDS), Diesel Hydro-treating
unit (DHDT), Lube Hydro-finishing unit, NMP Extraction unit, Propylene unit and Petrochemical Feedstock unit with fuel, lube, wax &
petrochemical feedstocks production facilities. The main products of the refinery are LPG, Motor Spirit, Superior Kerosene, Aviation
Turbine Fuel, High Speed Diesel, Naphtha, Bitumen, Lube Base Stocks, Paraffin Wax, Fuel Oil, Hexane and Petrochemical feed stocks.
Indian Oil Corporation Ltd., the holding company, markets a majority of fuel products produced by the Company. As on Dec 31, 2021, IOCL
held 51.9% equity stake in CPCL, with NIOC (National Iranian Oil Company) and others holding 15.4% and 32.7%, respectively.

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Operating Metrics
Crude Through put – MTPA GRM-US$/bbl

Capacity Utilisation Crude Oil WTI Fut-US$/bbl

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 Chennai Petroleum Corporation Ltd.
Financials (Consolidated)
Income Statement Balance Sheet
(Rs Cr) FY20 FY21 FY22E FY23E FY24E As at March FY20 FY21 FY22E FY23E FY24E
Net Revenues 37117 22445 33205 32682 35928 SOURCE OF FUNDS
Growth (%) -10.2 -39.5 47.9 -1.6 9.9 Share Capital 149 149 149 149 149
Operating Expenses 39330 20434 31835 31328 34410 Reserves 1210 1462 1771 2084 2518
EBITDA -2213 2011 1370 1354 1517 Shareholders' Funds 1359 1611 1920 2233 2667
Growth (%) -529.4 -190.8 -31.9 -1.1 12.0 Long Term Debt 2953 3018 2918 2718 2568
EBITDA Margin (%) -6.0 9.0 4.1 4.1 4.2 Net Deferred Taxes -934 104 114 125 138
Depreciation 468 466 509 512 523 Long Term Provisions & Others 121 131 144 159 175
EBIT -2682 1545 861 842 994 Minority Interest 0 0 0 0 0
Other Income 100 127 29 38 41 Total Source of Funds 3500 4864 5096 5235 5547
Interest expenses 413 375 427 412 404 APPLICATION OF FUNDS
PBT -2995 1296 462 468 631 Net Block & Goodwill 7256 7384 7193 7047 6940
Tax -938 1039 120 122 164 CWIP 1376 1309 1341 1408 1479
RPAT -2056 257 342 346 467 Other Non-Current Assets 408 476 449 476 506
APAT -2056 257 342 346 467 Total Non Current Assets 9040 9168 8983 8932 8925
Growth (%) 901.4 -112.5 32.9 1.2 34.9 Current Investments
EPS -138.1 17.3 23.0 23.2 31.4 Inventories 2361 4509 5458 5372 5906
Trade Receivables 124 200 273 269 295
Cash & Equivalents 4 5 236 389 295
Other Current Assets 374 343 298 274 287
Total Current Assets 2862 5057 6265 6304 6784
Short-Term Borrowings 5733 5656 5506 5356 5206
Trade Payables 1555 1882 2729 2686 2953
Other Current Liab & Provisions 1115 1823 1916 1959 2003
Total Current Liabilities 8403 9361 10152 10001 10162
Net Current Assets -5541 -4304 -3887 -3697 -3378
Total Application of Funds 3500 4864 5096 5235 5547
(Source: Company, HDFC sec)

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Cash Flow Statement Key Ratios
(Rs Cr) FY20 FY21 FY22E FY23E FY24E (Rs Cr) FY20 FY21 FY22E FY23E FY24E
Reported PBT -2,995 1,296 462 468 631 Profitability Ratio (%)
Non-operating & EO items 20 13 33 -32 -76 EBITDA Margin -6.0 9.0 4.1 4.1 4.2
Interest Expenses 413 375 427 412 404 EBIT Margin -7.2 6.9 2.6 2.6 2.8
Depreciation 467 463 509 512 523 APAT Margin -5.5 1.1 1.0 1.1 1.3
Working Capital Change 1,548 -1,683 -82 90 -250 RoE -85.4 17.3 19.4 16.7 19.1
Tax Paid -45 -2 -120 -122 -164 RoCE -14.2 0.5 2.5 2.5 3.3
OPERATING CASH FLOW ( a ) -593 462 1,230 1,328 1,069 Solvency Ratio (x)
Capex -987 -568 -350 -450 -500 Debt/EBITDA -3.9 4.3 6.0 5.7 4.9
Free Cash Flow -1,580 -106 880 878 569 D/E 6.4 5.4 4.4 3.6 2.9
Investments 0 0 0 0 0 PER SHARE DATA (Rs)
Non-operating income 24 20 29 38 41 EPS -138.1 17.3 23.0 23.2 31.4
INVESTING CASH FLOW ( b ) -963 -548 -321 -412 -459 CEPS -106.7 48.6 57.1 57.7 66.5
Debt Issuance / (Repaid) 1,973 409 -250 -350 -300 Dividend 0.0 0.0 0.0 0.0 0.0
Interest Expenses -389 -312 -427 -412 -404 BV 91.3 108.2 128.9 149.9 30.6
FCFE 4 -9 202 116 -135 Turnover Ratios (days)
Share Capital Issuance 0 0 0 0 0 Debtor days 1 3 3 3 3
Dividend -1 0 0 0 0 Inventory days 23 73 60 60 60
FINANCING CASH FLOW ( c ) 1,583 97 -677 -762 -704 Creditors days 15 31 30 30 30
NET CASH FLOW (a+b+c) 24 -79 -47 12 127 VALUATION (x)
P/E -0.9 7.2 5.4 5.3 4.0
P/BV 1.4 1.1 1.0 0.8 4.1
EV/EBITDA -4.8 5.2 7.3 7.0 6.1
EV / Revenues 0.3 0.5 0.3 0.3 0.3
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
(Source: Company, HDFC sec)

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One Year Price Chart

HDFC Sec Retail Research Rating description

Green Rating stocks
This rating is given to stocks that represent large and established business having track record of decades and good reputation in the industry. They are industry leaders or have significant market share. They have multiple streams of cash flows and/or strong balance sheet to withstand downturn in
economic cycle. These stocks offer moderate returns and at the same time are unlikely to suffer severe drawdown in their stock prices. These stocks can be kept as a part of long term portfolio holding, if so desired. This stocks offer low risk and lower reward and are suitable for beginners. They offer
stability to the portfolio.

Yellow Rating stocks

This rating is given to stocks that have strong balance sheet and are from relatively stable industries which are likely to remain relevant for long time and unlikely to be affected much by economic or technological disruptions. These stocks have emerged stronger over time but are yet to reach the level
of green rating stocks. They offer medium risk, medium return opportunities. Some of these have the potential to attain green rating over time.

Red Rating stocks

This rating is given to emerging companies which are riskier than their established peers. Their share price tends to be volatile though they offer high growth potential. They are susceptible to severe downturn in their industry or in overall economy. Management of these companies need to prove their
mettle in handling cyclicality of their business. If they are successful in navigating challenges, the market rewards their shareholders with handsome gains; otherwise their stock prices can take a severe beating. Overall these stocks offer high risk high return opportunities.

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