The next time you are engulfed in doubt about your stock-picking skills, remember this – even the professionals have a tough time spotting the winners. Case in point – Chennai Petroleum Corporation.
At the end of March this year, mutual funds cumulatively held a minuscule 0.80 percent stake worth Rs 28.20 crore in the small-cap firm.
Only two fund houses had exposure to the company – ITI MF and ICICI Prudential MF.
However next month, as the new fiscal got underway, even these two funds completely exited the stock, as per information sourced from Prime Database.
Chennai Petroleum Corporation Ltd (CPCL), a subsidiary of IOC, was among the only four companies that saw complete exits by MFs in April this year.
Perhaps the stock took this personally. After trading flat since the beginning of 2023, CPCL suddenly started to gain momentum.
The stock has more than doubled this fiscal so far, comprehensively outperforming all constituents of the BSE Oil and Gas index.
CPCL closed at its 52-week high of Rs 535.90 on September 12.
Winds of Change
‘Price drives narrative’ is a well-worn truism about the markets. But the price also drives behaviour, as has happened in this case.
In May 2023, the MF industry tip-toed back into the stock when Shriram Mutual Fund picked up a 0.01 percent stake for Rs 31 lakh. The next month, ICICI Prudential MF re-entered the counter with a 0.05 percent stake buy worth Rs 2.81 crore.
Some analysts are beginning to get interested in CPCL.
“Earlier, my sense was that CPCL will be weighed by declining refining margins due to Russia and China capturing the global market, coupled with declining discounts on Russian crude.
“But now, amid demand staying strong, CPCL’s GRMs (gross refining margins) are projected to rise to USD 15 per barrel in Q2 from around USD 11 in the June quarter,” Gagan Dixit, Senior VP, (Oil, Gas, & Aviation), Elara Securities, told Moneycontrol.
GRM is the difference between the cost of raw material (majorly crude oil) and weighted average prices of petroleum products. It is the key profitability metric for refiners.
Elara currently has a ‘sell’ call on CPCL, but Dixit said if its GRMs stay above USD 15 for around two quarters, this will make the stock a prime candidate for re-rating.
“One must also remember that the general sentiment around oil and gas stocks was negative at the start of this fiscal due to the pressure on crude prices following supply cuts by OPEC. But normalising Russian and Chinese supplies have changed the situation somewhat,” he added.
Analysts are cautious about the state-owned oil companies because of crude price breaching the USD 90 mark, which puts pressure on their marketing margins. However, Chennai Petroleum is an exception to this as the refiner’s main products like LPG, motor spirit, aviation turbine fuel, high-speed diesel, etc., are being marketed by parent company IOC.
CPCL directly markets only specialty products like paraffin wax, mineral turpentine oil (MTO), hexane, and petrochemical feedstocks, among others, which account for just 8 percent of its sales.
Indian oil firms saw their GRMs perk up in FY23 as they were importing cheap Russian Ural and exported refined oil at higher prices to markets like Europe. However, the Centre rolled out windfall profit taxes on crude oil producers last July. It later extended the tax imposition on gasoline, diesel and aviation fuel exports.
Earlier this year, a senior CPCL official said it plans to almost double the processing of Russian oil in the current fiscal 2023-24.
Last fiscal year, it processed about 1.4 million tonnes or 28,000 bpd of Russian oil, equivalent to about 13% of its overall crude refining, as per a Reuters report.
The company’s head of finance Rohit Kumar Agrawala in April said CPCL would continue to buy Russian oil, provided there were no legal or compliance hurdles.
Last fiscal year, the company bought Russian oil at a discount which at times was USD 3-4 per barrel and sometimes USD 7-8 per barrel to dated Brent, he had said.
Company Overview
Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries Limited (MRL) was formed as a joint venture in 1965 between the Government of India (GOI), AMOCO, and National Iranian Oil Company (NIOC).
AMOCO disinvested CPCL equity in favour of the Government of India in 1985. Later, the government transferred its equity to IOC and CPCL became a subsidiary of IOC in 2001.
Indian Oil Corporation (IOC) holds a majority stake of 51.89 percent.
The company’s consolidated revenue fell 34 percent to Rs 17,985.67 crore in the June quarter as compared to Rs 27,449.52 crore reported a year ago, while its net profit plunged 76 percent on-year to Rs 556.5 crore.
EBITDA (earnings before interest tax depreciation and amortisation) declined 72 percent to Rs 949.87 crore. Its operating margin contracted sharply to 5.3 percent from 12.4 percent a year ago.
CPCL was conceived as a grassroots refinery with an installed refining capacity of 2.5 MMTPA. Today, it is one of the largest refining corporations in South India, with an installed refining capacity of 10.5 MMTPA.
CPCL, through a joint venture with IOC and other investors, is also building a 180,000 bpd refinery in the Cauvery Basin at Nagapattinam in Tamil Nadu.
As of the quarter ended June 2023, prominent investor Dolly Khanna held a 1.84 percent stake in the firm.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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