Buy Chennai Petro;target of Rs 316: KRChoksey

KRChoksey's research report on Chennai PetroChennai Petroleum Corp Ltd (CPCL), erstwhile Madras Refineries, is the largest refinery in South India with a refining capacity of 11.5 mmtpa across two locations—Manali and Cauvery Basin, both in Tamil Nadu. It also has a lube refining capacity of 0.27 mmtpa and a wax production capacity of 30,000 mmtpa. Currently IOC holds 51.9% while NICO holds 15.4%. CPCL has installed capacity of 11.5 mmtpa (10.5mmt at Manali Refinery with nelson complexity index 7.98 and remaining 1mmt at Nagapattinam with nelson complexity index 1) and it markets its refined products through its parent Indian Oil.The long term prospects of the company remain strong with the potential GRM upside. CPCL has initiated efforts to reduce working capital requirement by reducing credit period to 10 days (from 16days) for products sold to IOCL and better inventory management initiatives (now 35days vs 52days earlier). This coupled with lower oil price would reduce working capital requirement. Hence, we expect CPCL to generate higher operating cash flow in FY16E/FY17E. We believe substantial debt repayment over next two years. CPCL is setting-up an INR 31bn Resid up-gradation project (expected to get completed by end-FY17) to increase the distillate yield of the Manali refinery from ~71 % to ~77% and use of high sulphur crude to 83% (from 65% currently). The company expects incremental GRM of USD1.5-2/bbl. Removal of sanction for Iran would help CPCL to source crude from Iran with higher credit period (60-65days vs 40days currently) and better discounts on oil price. We initiate coverage with a BUY rating on the stock with price objective of INR 316/share. Currently stock trades at 4.87x FY17E EPS. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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