Chennai Petroleum - A dismal FY13, FY14 looks dull as well - ElaraCapital

Q4FY13 losses take annual losses deeper

Chennai Petroleum (CPCL) reported a net loss of INR3.9bn for Q4FY13 with reported GRMs of USD0.8/bbl. The GRMs were hit by crude and product inventory losses of INR2.7bn, implying an impact of USD2.5/bbl. With this, CPCL ended FY13 with a net loss of INR17.7bn as CPCL reported losses in all quarters, except Q2FY13. The throughput for Q4FY13 and FY13 was 2.8MMT and 9.7MMT respectively, implying 84% annual capacity utilizations. We expect some recovery in throughput in FY14, as FY13 had seen a maintenance shutdown in Q2FY13.

Rising debt levels, no upgrades are worrying factors

Due to the net losses in FY13, CPCL's debt levels have shot up to INR57.1bn from INR34.4bn in FY12. As a result we have seen the interest costs nearly double to INR4.7bn in FY13. We expect these debt levels remain as we do not see strong cash flows for CPCL due to lack of any capacity or complexity upgrades.

Earnings bottom not visible in the current refining environment, Downgrade Sell from Reduce

CPCL's core operational GRMs are likely to be around USD3/bbl at best in the current sluggish refining environment. With the high interest costs and high debt, CPCL's bottom-line should remain weak. We forecast a RoE of 2-7% for FY14/15 for CPCL and based on this, we see the stock continuing to trade at 0.5x P/Bv. However, if net losses continue, then clearly even this book value is open for decline. On an EV/EBITDA basis, the valuations look even worse as the high debt levels indicate substantial downside in case of a dismal FY14. Overall, we do not recommend CPCL as a play on GRMs (despite looking cheap) as there are better plays available in the market for GRMs. We have been negative on CPCL since INR220/sh levels and we now downgrade CPCL to Sell from Reduce, trimming our target price to INR90/sh (0.5x FY14 book).

Source : Equity Bulls

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