Kotak Positive on Chennai Petroleum Corporation

Chennai Petroleum Corporation Limited (CPCL), a subsidiary of IOC (the largest player in the Indian downstream oil and gas sector), has executed a major revamp of crude distillation unit at its Manali refinery which will lead to 1). Optimized production of premium products, 2). Better realization, 3). Processing of low priced crude oil, and 4). Improved margins. With this revamp, CPCL's total capacity has increased by 5.22% to 12.1 MMTPA. We believe the full benefit of the same will be reflected in FY15E and onwards.

We are positive on CPCL mainly on account of its 1). Expected additional revenue flows from capacity expansion, 2). Technology up-gradation projects under-taken & planned in the future, 3). Recent grant of longawaited government approvals, 4). Expected improvement in margins, 5). Optimization of operating cost and 5). Attractive valuations compared to its peers. In the last one year, the stock has corrected by ~52%, due to delays in getting government approvals, temporary shutdown, lower GRMs, Iran issues, etc. Now with all these concerns behind us, we believe this offers attractive opportunity for long term investors. We initiate coverage on CPCL with a BUY rating as it is currently trading at attractive valuations. There is upside potential of 22% with the price target at Rs. 76/Share. We value CPCL's business at a target PE multiple of 6.5x FY15E earnings. At current price of Rs.62, the stock is trading at 5.3x P/E and 6.9x EV/EBITDA multiples based on FY15E earnings. Global refining companies are currently trading at an average 11.3x their one-year forward EPS.

Source : Equity Bulls

Keywords