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Tuesday, September 25, 2007

Buy Chennai Petroleum

Despite it's strong underlying business, Chennai Petroleum (CPCL) has always maintained a low profile as compared to it's peers like BRPL and MRPL. With strong GRM's and refinery capacity expansion CPCL outlook seems to be positive and is expected to fetch better valuation going forward.

At the current market price of Rs. 280/- the stock traders at 7.3 times it's trailing 12 month EPS. The net profit in Q1 FY08 increased by 27% y-o-y despite 4% drop in revenues. The decrease in revenue seems to be attributed to the 15 days shutdown of one of CPCL's distillation unit. The Gross Refining Margin during the first quarter was an impressive US $8.76 per bbl as compared to US $6.64 per bbl during the corresponding quarter of the previous year. CPCL Q1 FY08 OPM stands at 7.28% as compared to FY07 OPM of 4.89%, thanks to the strong GRM's.

CPCL expects the Q2 GRM to be around the range of US $7.5 per bbl and the whole FY08 GRM in the range of USD $5.5-7. Based on the long term crude price assumption of USD 60/bbl and Re/USD assumption of USD 40 the stock trades around 5.8 times it's FY08E EPS of 48. Based on the factors discussed earlier CPCL has a target of Rs. 355/- with a time frame of 12 months.

Fundamentals

1) The company is expected to increase their refining capacity to about 12 million tonnes from the current 10.5 million tonnes by mid 2009.

2) Excellent and consistent financial track record.

3) Good track record of consistent and high dividend payment.

Risks

1) Stronger rupee can offset the realization by better GRM's.

2) Drop in price of CPCL products in International Markets.

Posted by Srivatsan

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2 comments:

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February 1, 2010 at 3:08 AM
Anonymous said...

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February 6, 2010 at 12:18 PM

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Fundamental Analysis

Fundamental Analysis is the cornerstone of Investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis.

During fundamental analysis we look at a stock from three aspects

Company

At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition.

Industry

At the industry level, there might be an examination of supply and demand forces for the products offered.

Economy

Fundamental analysis might focus on economic data to assess the present and future growth of the economy.

To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient.