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Thursday, 13 July 2017

CHENNAIPETRO: Potential Multibagger, Chennai Petroleum Corporation Limited



Chennai Petroleum Corporation Ltd                                             Date: July 2017
Symbol: NSE: CHENNPETRO, BSE: 500110

Industry: Refineries/ Petro-Products

CMP: 364.5
Target: 100%
Stop Loss: No Stop loss
Time Period: 2-3 Years
Book Value: 223.30
Face Value: 10.00
Market Cap.: 5,428.98 Cr.



Brief About Company:
Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries Limited (MRL) was formed as a joint venture in 1965 between the Government of India (GOI), AMOCO and National Iranian Oil Company (NIOC) having a share holding in the ratio 74%, 13% and 13% respectively.

From the grassroots stage, CPCL refinery was set up with an installed capacity of 2.5 million tonnes per annum (MMTPA) in a record time of 27 months at a cost of Rs 43 crore without any time or cost over run.
In 1985, AMOCO disinvested its stake in favour of the GOI and the shareholding percentage of GOI and NIOC stood revised at 84.62% and 15.38% respectively. Later GOI disinvested 16.92% of the paid up capital in favour of Unit Trust of India, mutual funds, insurance companies and banks on 19th May 1992, thereby reducing its holding to 67.7%.


The public issue of CPCL shares at a premium of Rs 70 (Rs 90 to FIIs) in 1994 was over subscribed to an extent of 27 times and added a large shareholder base of over 90,000. As a part of the restructuring steps taken up by the Government of India, Indian Oil Corporation acquired equity from GOI in 2000-01.

Currently IOC holds 51.88% while NIOC continued its holding at 15.40%.
CPCL has two refineries with a combined refining capacity of 10.5 Million Tonnes Per Annum (MMTPA). The Manali Refinery has a capacity of 9.5 MMTPA and is one of the most complex refineries in India with fuel, lube, wax and petrochemical feedstock production facilities.

The company's second refinery is located in the Cauvery Basin at Nagapattinam. The initial unit was set up with a capacity of 0.5 MMTPA in 1993 and later on its capacity was enhanced to 1.0 MMTPA.

The commissioning of the 3 MMTPA expansion cum modernization project enabled CPCL to meet the auto fuel quality norms of Bharat Stage II & Euro III equivalent.

Products:

The main products of the company 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.

The wax plant at CPCL has an installed capacity of 30,000 tonnes per annum, which is designed to produce paraffin wax for manufacture of candle wax, waterproof formulations and match wax. A propylene plant with a capacity of 17,000 tonnes per annum was commissioned in 1988 to supply petrochemical feedstock to neighboring downstream industries.

The unit was revamped to enhance the propylene production capacity to 30,000 tonnes per annum in 2004. CPCL also supplies LABFS to a downstream unit for manufacture of Liner Alkyl Benzene.

The company exported Lube Oil Base Stock (LOBS) for the first time to Sri Lanka for commissioning the Lube Blending Plant of Lanka IOC during the year 2007-08. The board of directors has recommended a dividend of 170% on the paid up capital and thereby maintained the uninterrupted payment of dividends for the past thirty five years, from the third year of its operations.

In 2010 CPCL CBR bagged ''Award for TPM Excellence, category A'' indicating that TPM is implemented for all the 8 pillars excellently in entire CBR by JAPAN Institute of Plant Maintenance (JIPM) during January 28, 2010

The last point is underlined because for the people who don’t know the TPM, its best in class practice for any manufacturing industry. The Achievement of TPM is only possible for the so organized and structured companies, in which CPCL achieved in 2010 itself. I am a fan of TPM.

Bullet Points:                 (All financials are based on TTM data, Last 4 Quarters)

Positive:

1.       Stock is trading at attractive P/E of 5.2, lowest among peers and historically
2.       Promoters Holding 67% with Zero pledged shares
3.       Revenue is approx. 6 times to Market Cap. 30,350 to the 5,365
4.       ROE is above 38% highest among peers.
5.       Price / book is at 1.61, median among peers
6.       Sales YoY 7%
7.       Operating Profit YoY 40%
8.       Operating margin % OPM 7% (Highest historically)
9.       PAT growth 34% YoY
10.   Other income and Interest reduced by 10% YoY
11.   Net Profit Margin (NPM%) at 4% highest historically
12.   Cash from Operating Activity increased by 110% YoY
13.   Capital Work in Progress (CWIP) increased by 110% YoY
14.   Total debt reduced by 30% YoY
15.   Market Cap increased 50% YoY
16.   Reserves increase by 40% YoY
17.   Earnings Yield above 12%
18.   EPS at 69 vs. 51 last year with EPS growth 35%
19.   PEG attractive at 0.38
 
Negative:

1.       Sales Growth 3 Years at -15% , 5 Years@-5%, 10 Years@1%
2.       Operating Margin 3 Years at 1% , 5 Years@1%, 10 Years@2%
3.       PAT Growth 3 Years at 1-176% , 5 Years@9%, 10 Years 4%
4.       Tax @ 25% to the Profit before Tax (PBT)
5.       Debt although reducing but its 3 times to Yearly PAT
6.       Historical YoY performance Inconsistent
7.       QoQ performance Inconsistent , Q4 PAT 170, Q3 291, Q2 98, Q1 469.8
8.       QoQ PAT down -63%
9.       Net cash flow in Low
10.   Not paying Dividend regularly
Synopsis on Bullet points: 
Considering the above Positive and Negative points, It’s clear that the company has outperformed from its previous year 2015-16 but the growth is Inconsistent from past years say 3 years or five years.

If the financial performance continues as like the same way before its definitely a MULTIBAGGER because of its lowest valuations but as seen the inconsistency, we believe that the company will be performed consistently here after and we believe that the Revenue will be Increased YoY for at least next 3 Years. 
Let’s see the reasons for our belief:

Point:1 Capital infusion by IOCL

 A brief from annual report


The result is
And what’s IOCL opinion on CPCL

So on a Clear Context, IOCL infused huge capital (Rs. 1,000 Crore) in to CPCL and also in coordination for the process and performance improvements.
We seen the difference also above and we expect the same support from IOCl in future also as it got the Excellent rank in MOU from the DPE for the previous years.

Point:2 Institutions and Mutual Fund Houses Holding


All are Grade A Institutions/ companies and holdings are huge and moreover small fund houses starting buying on QoQ basis.


Point:3 Completed Projects:


So the Outperformance of TTM is due to the operational of above two projects and also we can expect the higher revenues from these projects. Also new products added to the production line which is an added advantage

Point:3 CWIP (Capital Work in Progress)
The company is so aggressive on capital and assets expansion from last four year CWIP grown at approx unbelievable of 1000% and the capital increasing 100% YoY from last 3 years and importantly with the Reduction of Debt. So that means the company is effectively using the Cash without burdening the balance sheet by Long Term Debts. The ongoing projects are



So all four ongoing projects are expected to complete on March-2017 as per the last annual report that means these projects will be operational from these quarter Jun/Sep-2017 and a big plus to Future Revenues

Point:4  Upcoming Projects:

The desire of Capital expansion is not ends here as the company is looking forward for more projects.


Point:5  New Patents and Research and Development (R&D):






Point:6  Company +’s:

1.      Cauvery Basin Refinery bagged best safety practices award 2015
2.      Decent Energy Consumption measures
3.      No major observations in Audits of 2015-2016
4.      Certified of ISO and TPM
5.      New Technology absorptions and New product developments

OPPORTUNITIES:

1.      High Demand of petroleum products in India
2.      New products and projects
3.      Sustainable developments in Operational activities with the coordination of IOCL
4.      Energy conserve measures will yield long-term profit abilities
5.      Feasibility study for Solar project of 5 MW which in turn saves energy cost
6.      Low Crude Oil prices

RISKS and CONCERNS:

1.      As the total company’s raw material is Crude oil and major portion is imported from Gulf, Any disruption in supply will lead to economic instabilities
2.      Future observation of Govt. tax on imports may change the dynamics
3.      As refinery Units are highly sensitive, although CPCL using best safety practices but a major accident can disrupt the whole structure
4.      As per govt. policy, all the refineries need to produce the BS-IV specified auto fuels by April 2020, Although the CPCL is ramping up for the facilities but it may absorb the investments up to Rs. 1000 Crore
5.      Withdrawal of IOCL investment at anytime will make a major impact


FINAL NOTE:

With all the considerations we believe that Chennai Petro can be a Potential Multi Bagger with the time Horizon of 2-3 Years and can be added in every dips and one must keep track of QoQ financial statements and overall industry policies and performances.

Disclaimer:

We are not involved with any type of dealing with Chennai Petroleum Corporation limited and neither with belonging employees and all the report made with personal interest and usage.
Sources Used:
1.      Annual Report 2015-2016
2.      Screener.in
3.      Valuereaserchonline.com
4.      Trendlyne.com
5.      Bseindia.com
6.      Moneycontrol.com

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