Report Date Company Name Price / Recommendation 3rd April 2010

Chennai Petroleum Corp Ltd.

CMP 291

HOLD (Initiating Coverage) Key Data

Company Background
Chennai Petroleum (CPCL), a subsidiary of Indian Oil Corporation Ltd, is a standalone refining company with dominant presence in South India. Formerly known as Madras Refineries Ltd, CPCL has two refineries in Manali and Cavery Basin (Nagapattinam) with aggregate annual capacity of 10.5MMT. Manali refinery is the primary refinery with a capacity of 9.5MMTPA and produces fuels, lubricants, wax and petrochemical feedstocks. Main products include LPG, motor spirit, aviation turbine fuel, High speed diesel, naptha, hexane, lube base stocks and others. In addition, CPCL has a wax plant with annual installed capacity of 30,000 tonnes and a propylene plant with an annual capacity of 17,000 tonnes.

Investment Rationale
Dividend paying stock: The stock has a long history of dividend payments. Since listing of the stock, the company skipped dividend payment for the first time in FY2009 which was a loss making year due to the global recession. The company had paid a dividend of 170% in FY2008. In FY2010, the company is expected to come back to the dividend list. Gross Refining Margins to strengthen: In recent past, GRM reached to its all time low. But now the worst is over, and with the global economy back on the growth path, we expect GRMs to stabilize at higher levels. Higher GRMs will boost the profits of the refinery.

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Cavery Basin Refinery to operate at full capacity: Due to lower availability of crude, Cavery Basin refinery is underutilized. It is expected that the availability of crude will increase which will lead to full capacity utilization.

Peer Analysis
CPCL is a standalone refinery and its closest peer is MRPL. We have not considered Reliance Industries and Essar Oil due to their complexity in product portfolio which makes it quite different from CPCL.

Looking at EV/Production and EV/Installed Capacity, the CPCL stock is traded at a cheaper level than compared to MRPL.

Risk and Concerns

The refining margins change according to international market conditions for Crude and Refined Products. GRMs has been quite volatile of late and consequently fluctuations will impact the profits of the company.

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CPCL is a standalone refinery and a subsidiary of Indian Oil Corporation (IOCL) which is a public sector company. IOCL is governed by the Indian Government policies. So any policy changes will have a bearing on CPCL. Appreciation in Rupee in comparison to US Dollar will adversely affect GRM in Rupee terms.

Valuation and recommendation

The GRMs are expected to stabilize at a higher level and the global economic conditions expected to improve, we foresee a favourable impact on CPCL. This is available at a much lower cost when compared to MRPL. We expect the stock to return to dividend list and we recommend Hold for the stock.

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