A detailed research report on Chennai Petroleum Corporation Limited

Chennai Petroleum Corporation Limited is of strategic importance to IOCL. Latter has, and will continue to own majority stake in former. Parent has strong representation on the company’s board, including a common chairman. The company can see operational synergies as IOCL is also in same business. Such synergies include pooled sourcing of crude oil with support of IOCL, and benefits from parent’s bulk purchase.

Chennai Petroleum Corporation Limited

Chennai Petroleum Corporation Limited is one of leading group companies of IndianOil’s and it was conceived in 1960s as 2.5 million metric tonnes per annum (MMTPA) refinery which was designed to produce fuels and lubes base stock. Past five decades of the company have an eventful, growth-oriented phase as management of the company built an organisation to reach current stature of 10.5 MMTPA capacity.

In today’s time, the company stands tall among public-sector refining companies in India and it has a complex refinery of its kind in country, producing value-added petroleum products. The company was able to pioneer key initiatives in several areas like process optimisation, technology absorption, energy conservation, waste land reclamation and environment management.

Business model of Chennai Petroleum Corporation Limited

Formerly known as Madras Refineries Limited (MRL), Chennai Petroleum Corporation Limited was formed as joint venture between Government of India, AMOCO and National Iranian Oil Company (NIOC) in 1965 to establish a refinery at Manali, Chennai. In 1985, AMOCO disinvested Chennai Petroleum Corporation Limited equity in favour of Government of India. Later, government of India transferred equity to IndianOil, and finally the company became a subsidiary of IndianOil in 2001.

CPCL Manali Refinery has been categorised as a complex refinery in India, with Fuel, Lube, Wax and Petrochemical feedstocks production facilities. The company’s wax plant of 30,000 metric tonnes (MT) per annum helps in producing paraffin wax for manufacturing candle wax, waterproof formulations, and match wax. Unit supports livelihood of 30,000 beneficiaries, mainly from domestic and Micro, Small & Medium Enterprises.  

Main products of the company include LPG, Motor Spirit, Superior Kerosene, Aviation Turbine Fuel, High-Speed Diesel, Naphtha, Bitumen, Lube Base Stocks, Paraffin Wax, Fuel Oil, Hexane, and Petroleum Coke. The company is a mother industry supplying Linear Alkyl Benzene Feedstock (LABFS) and many other petrochemical feedstocks to downstream units.

Track record of management

Shrikant Madhav Vaidya is Chairman of Chennai Petroleum Corporation Limited and IOCL. He is a chemical engineer from NIT, Rourkela having more than 34 years of extensive experience in refining & petrochemicals operations. He has had a decade-long association with country’s largest cracker plant – Panipat Naphtha Cracker Complex, a major driver of IndianOil’s petrochemicals business. Mr. Vaidya is a designated Non-Executive Chairman on Board of Chennai Petroleum Corporation Ltd. (a subsidiary of IndianOil), Ratnagiri Refinery & Petrochemicals Ltd., Indian Oiltanking Ltd. (all two are JV Companies of IndianOil).

Mr. Arvind Kumar is Managing Director of Chennai Petroleum Corporation Limited and holds a bachelor’s degree in Mechanical Engineering and Master’s degree in Business Administration having specialization in Operations Management. Having more than 3 decades of experience in areas of Engineering, Project Management, Materials & Contract Management, he is a non-executive Chairman of Indian Additives Limited (IAL), a JV company of M/s. Chevron Oronite Company and Chennai Petroleum Corporation Limited which manufactures and sells lubricating oil additives.

Financial performance of Chennai Petroleum Corporation Limited

Despite challenges due to repeated waves of COVID-19, the company saw stellar performance in FY22. Strategic decisions which were taken over past few years and resilience of its business model have supported its results. The company saw significantly higher profit before tax of INR1,832 crore, exhibiting 43% growth. Profit after tax of the company was significantly higher at INR1,342 crore against INR238 crore in prior year. Strong operations after shut down and higher cracks contributed significantly to improved performance. In FY22, the company saw all-time high turnover of INR60,402 crore. The company was able to achieve throughput of 9.040 MMTPA in 2021- 22 against 8.243 MMTPA in prior year. Crude throughput was lower because of product containment due to lower product demand as a result of Covid-19 pandemic in Q1 and Refinery-III M & I shutdown in Q2.

Revenue from operations of the company in 1Q23 was INR21,350.20 crore and its total income of INR21,351.98 crore. Profit of the company was INR1,004.19 crore as against INR994.42 crore.

Industry analysis

Recent report by International Renewable Energy Agency (IREA) shows “Sharpened investors’ interest” in sustainable and resilient assets, which includes renewables too. A range of oil and gas companies have set net-zero-emission targets to combat change in climate. Despite present economic challenges, many are sustaining efforts to decarbonize operations and value chains.

Though economies were impacted to a large extent because of COVID-19 lockdowns, addition of renewable sources of energy like wind and solar PV increased at fastest rate in 2 decades, and EV sales reached new records. Substantial support for new energy economy has been seen, supported by policy action, technology innovation and urgency to tackle changes in climate. Renewable energy continues to possess significant potential to reduce prices and dependence on fossil fuels over short and long term.

Direct air capture is very critical in net zero pathways. Capturing of CO₂ directly from air and storing it removes CO₂ from atmosphere. This offers a way to balance emissions which are difficult to avoid, including from long-distance transport and heavy industry, and providing solution for legacy emissions. In International Energy Agency (IEA) Net Zero Emissions by 2050 scenario, direct air capture technologies capture over 85 million tons (Mt) of CO₂ in 2030 and ~980 MtCO₂ in 2050. This means we need a large and accelerated scale-up from ~0.01 MtCO₂ today.

Surge in global commodity prices since mid-2021 saw major impact on major oil companies. Prices of crude oil increased 36 % between August 2021 and February 2022, because of strong recovery in oil demand, with short-lived effects of COVID-19 (Omicron variant) in late 2021, followed by global tensions such as Russia’s invasion of Ukraine. As per Petroleum Planning & Analysis Cell Report, India was able to import 212.2 million tonnes of crude oil in FY22, exhibiting a rise from 196.5 million tonnes in prior year. However, this was lower than pre-pandemic imports of 227 million tonnes in FY20.

Future strategies of Chennai Petroleum Corporation Limited

To stay competitive and excel in uncertain and volatile energy market which is impacted by shifts in supply and demand dynamics, refiners are required to find ways so as to improve operational efficiencies, enhance productivity and produce refined products at in a cost-effective way. Importantly, they need to address critical operational challenges to reduce risks which might impact profit and safety.

Refinery profitability depends on product cracks in international market. While product cracks were quite low in 1H22, they improved gradually during 2H and were robust in 4Q.

During FY22, the company saw substantial growth in sale of products like Propylene, Paraffin wax, Petcoke & Sulphur with support of proactive marketing initiatives. Direct sale of products increased despite COVID-19 pandemic. Supported by strong physical performance and improved cracks and 

inventory gains, the company decided to reset OIDB loan interest as it switched from fixed rate of interest to floating rate of interest. This should result in interest cost savings.

In a bid to improve profitability, the company identified several schemes and some new projects.

ü  Group II LOBS Project- The company plans to implement project for production of Group II Lube Oil Base Stocks so that LOBS production can be improved. First stage approval was received and progress is being made on pre-project activities.  

ü  Pharma Grade Hexane Project- As value addition initiative, the company plans to implement a project for production of Pharma Grade Hexane, apart from Food Grade Hexane. Process design was completed and progress is being made on engineering / procurement activities.

Digital technologies are utilised to build, operate and maintain refinery assets with greater safety and efficiency. There are estimations that 80 % of plant losses can be prevented and digital solutions can help in capturing some losses.

Shareholding pattern of Chennai Petroleum Corporation Limited

Promoters of Chennai Petroleum Corporation Limited held ~67.29% stake in the company at March 2023 end. Indian Oil Corporation Limited held ~51.89% while Naftiran Intertrade Company Limited had ~15.40% stake in the company. In March 2023 quarter, interest of FIIs increased to ~7.67% as compared to ~5.07% in December 2022 quarter.

Risks

High risk for the company includes factors which can affect continuous operation such as low-capacity utilization, erosion in refining margin, cost and time related to projects, safety risk and impact on operations and projects because of COVID pandemic.

Chennai Petroleum Corporation Limited can experience medium risks such as data leakage, security risk, environmental risk and other Govt. policy decisions which can impact profitability and ability to do business.

Valuation and investment rationale

Stock of the company currently trades at ~4.90x of FY22 EPS which is at a deep discount to its sectoral average of ~14.87x. Therefore, significant upside potential is expected in stock price moving forward. This upside is expected to stem from strong operational, managerial, and financial support from parent company, improvement in financial risk profile, favourable industry dynamics, etc.

Improvement in operating performance significantly supported balance sheet position of the company. Adjusted gearing saw an improvement to 3.36 times as on March 31, 2022 as against 6.92 times as on March 31, 2021 and the company’s interest coverage increased to 6.67 times in fiscal 2022 from 5.82 times in fiscal 2021.

Borrowings of the company increased to INR9,409 crore as on March 31, 2022 from INR9,167 crore as on March 31, 2021. This was to fund working capital requirement as a result of increased volatility in crude oil prices. However, given significant improvement in operating performance during initial 9 months of fiscal 2023, borrowings have reduced to INR7,472 crore as on September 30, 2022.

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