Edelweiss - Chennai Petroleum - refining margins rebound; result update Q4FY07; upgrade to Buy

Chennai Petroleum (MRL IN, INR 231, upgrade to Buy)

Chennai Petroleum's (CPCL) Q4FY07 numbers were above expectations. Net profit increased by 434% Y-o-Y and 678% Q-o-Q due to a rebound in refining margins.

CPCL reported GRMs of USD 6.42/bbl in Q4FY07 compared to USD 2.65/bbl in Q4FY06 and USD 2.95/bbl in Q3FY07. The increase in reported GRMs were inline with increase in regional refining margins (Edelweiss India refining margins were up at USD 5.6/bbl from USD 4.08/bbl in 4QFY06 and USD 2.84/bbl in 3QFY07). For FY07, CPCL reported GRMs of USD 5.0/bbl, up from USD 4.37/bbl reported in FY06.

We are revising our FY08 and FY09 EPS estimates upwards by 16% and 34% to INR 34.7/share and INR 35.2/share, respectively. We have increased our forecast for regional GRMs as we believe that time and cost overruns in new refinery capacity addition worldwide will help sustain GRMs in FY08 and FY09. We estimate CPCL to report GRMs of USD 4.97/bbl in FY08, up from our previous estimate of USD 4.23/bbl.

We are upgrading the stock to 'BUY' from 'ACCUMULATE' as at CMP of INR 231, the stock trades at 6.7x and 6.6x our FY08 and FY09 EPS estimates with a FY08 dividend yield of 5.3%. On an EV/EBITDA basis, CPCL trades at 4.5x and 4.0x our FY08 and FY09 estimates, which is at a steep discount to the international refining and marketing companies' median at 6.9x and 6.2x FY08 and FY09 consensus estimates.

Edelweiss - Chennai Petroleum - refining margins rebound; result update Q4FY07; upgrade to Buy