Investors with a long-term perspective can consider investing in the stock of standalone refiner, Chennai Petroleum (CPCL). Attractive valuations, and refinery up-gradation and capacity expansion plans which should boost earnings, support our recommendation. The CPCL stock tumbled after the company posted losses in the June 2011 quarter. The poor report card was a result mainly of lower refining margins (on sequential basis) and plant shutdown. Since end-July, when the results were declared, the stock has lost around 11 per cent compared to the 8 per cent drop in the Sensex. At its current price of Rs 195, the stock discounts its trailing 12 month earnings by 5.7 times, lower than its historical average and cheaper than the nine times at which peer MRPL currently trades at.

After a solid performance in the March quarter when CPCL clocked gross refining margin (GRM) of $8.3 a barrel, the company, like most public sector refiners, delivered a disappointing June 2011 quarter. Its GRM dipped to $2.35 a barrel, though this was better than the $1.79 a barrel posted in the year-ago period.

The decline in sequential performance seems to be the result of high volatility in crude oil prices which crimped inventory gains, reduction in product cracks, and a 22-day maintenance closure at its units. Result: CPCL posted a loss of around Rs 55 crores in the June quarter, compared with profit of Rs 314 crore in the March quarter. While oil prices continue to yo-yo, better product cracks and improved utilisation levels should aid the company 's margins.

Growing capacity

Besides, what lends confidence to the company's prospects is its continuing expansion and upgradation programmes. Revamp of a unit at its mainstay Manali complex near Chennai expanded CPCL's total refining capacity from 10.5 mtpa to 11.5 mtpa. It is also ramping up the capacity of another unit in Manali by 0.6 mtpa. This process, expected to be completed by May 2012 should take the company's capacity to 12.1 mtpa, and enhance earnings. In addition, the company is actively considering putting up a greenfield refinery at Manali of 6 mtpa, which will raise total capacity to 18.1 mtpa.

Besides, CPCL plans to implement a resid upgradation project, for which environmental clearance is awaited. This project should improve the company's high-value distillate yield by 6 to 7 per cent, and improve refining margins by around $2 a barrel.

Other projects include the company's Euro IV project for auto fuel quality upgradation, which is underway and is expected to be completed by December 2011. The company also plans to replace by November 2012 the existing 30 inch pipeline from the Chennai port to the Manali refinery with a new 42 inch pipeline to enhance the discharge rate from tankers and reduce demurrage cost. Besides, the 20-inch pipeline project connecting Karaikkal Port to the company's 1 mtpa capacity Cauvery Basin Refinery is expected to be completed by December 2011.

CPCL has also entered into an agreement with the Karaikkal Port for bringing in bigger vessels with crude supplies to the Cauvery Basin Refinery. This should enhance the refinery's utilisation levels. CPCL's debt-to-equity ratio stands at 0.99, providing scope for further leverage to fund expansion plans. Also, the company's dividend yield has been quite healthy and stood at around 5.5 per cent in the recent period.

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