Chennai Petroleum up 10%; KR Choksey initiates coverage with buy

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26 Aug, 2025 12:21

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Moneycontrol Bureau

KR Choksey has initiated coverage with a buy rating on Chennai Petroleum Corporation (CPCL) with a price target of Rs 316 apiece as long term prospects of the company remain strong with the potential gross refining margin (GRM) upside. The stock gained nearly 10 percent intraday Friday.

CPCL has initiated efforts to reduce working capital requirement by reducing credit period to 10 days (from 16 days) for products sold to IOC and better inventory management initiatives (now 35 days against 52 days earlier).

"This coupled with lower oil price would reduce working capital requirement. Hence, we expect CPCL to generate higher operating cash flow in FY16/FY17. We believe substantial debt repayment over next two years," says the brokerage.

CPCL is setting-up an Rs 3,100 crore Resid up-gradation project (which is expected to get completed by end-FY17) to increase distillate yield of Manali refinery from around 71 percent to 77 percent and use of high sulphur crude to 83 percent (from 65 percent currently).

KR Choksey says the company expects incremental GRM of USD 1.5-2 a barrel, adding removal of sanction for Iran would help CPCL to source crude from Iran with higher credit period (60-65 days against 40 days currently) and better discounts on oil price.

With lower inventory losses, lower fuel & loss cost on account of decline in crude price (incremental GRM expected at around USD 3.1/bbl) and firm petroleum product crack spread, the brokerage expects Chennai Petroleum GRM to improve to USD 5 a barrel over FY16-FY17 against USD 1.9 abarrel in FY15. Consequently, it expects CPCL's EBITDA to increase to Rs 1,242 crore in FY17 against loss of Rs 149.2 crore at EBITDA level in FY15.

Chennai Petroleum Corporation, 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 percent stake while NICO holds 15.4 percent in the company. CPCL has installed capacity of 11.5 mmtpa and it markets refined products through its parent Indian Oil Corporation.

The brokerage says CPCL will benefit from higher distillate yield, crude mix, and product swings in a scenario of larger spreads between light and heavy crude. CPCL’s ability to use high sulphur crude will further help its refining margins. Also, the company’s coastal location enables easier access to crude and its status as the only refinery in Tamil Nadu ensures sufficient demand. IOC’s majority ownership provides CPCL with marketing and distribution access in South India and Sri Lanka, says KR Choksey.Recently the board of CPCL has decided to issue 100 crore non convertible cumulative redeemable preference shares at Rs 10 per share (at a par), as a private placement to IOC.The brokerage believes, this initiative will help CPCL to speed up its ongoing projects such as the resid up-gradation project, crude oil pipeline project and Mounded Bullet Storage projects of Rs 280 crore.

At 14:35 hours IST, the scrip of Chennai Petroleum Corporation was quoting at Rs 201.75, up Rs 14.95, or 8 percent on the BSE.Posted by Sunil Shankar Matkar