News Highlights. What s Inside. Result Update: Praj Industries & Chennai Petroleum Corporation

Transcription

1 Morning Insight % Chg 29-Jan 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 35,593 (0.2) (1.3) 4.5 NIFTY Index 10,652 (0.1) (1.9) 3.9 NSEBANK Index 26,573 (0.3) (2.0) 6.5 NIFTY 500 Index 8,876 (0.0) (3.0) 3.1 CNXMcap Index 16, (6.1) (0.3) BSESMCAP Index 13,708 (0.1) (6.1) (1.2) World Indices Dow Jones 24, (1.2) Nasdaq 7,028 (0.8) 6.7 (1.9) FTSE 6, (2.9) NIKKEI 20, (4.2) Hangseng 20, (4.2) Shanghai 27,532 (0.2) Value traded (Rs cr) Cash BSE 29-Jan 2,987 % Chg Day (2.6) Cash NSE 33,412 (5.3) Derivatives 855,504 (4.8) Net inflows (Rs cr) 28-Jan MTD YTD FII (77) (3,217) (3,217) Mutual Fund 103 6,825 6,825 Nifty Gainers & Losers Price Chg Vol 29-Jan (Rs) (%) (mn) Gainers Adani Ports Bharti Infra Bajaj Finserv 6, Losers Eicher Motor 18,877 (5.6) 0.2 Gail India Ltd 324 (2.9) 6.1 Yes Bank 203 (2.2) 76.7 Advances / Declines (BSE) 29-Jan A B T Total % total Advances Declines Unchanged Commodity % Chg 29-Jan 1 Day 1 Mth 3 Mths Crude (US$/BBL) 61.3 (0.0) 17.4 (19.3) Gold (US$/OZ) 1, Silver (US$/OZ) Debt / forex market 29-Jan 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ Nifty 11,900 11,400 10,900 10,400 9,900 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Source: Bloomberg News Highlights The gems and jewellery has sought reduction of gold import duty to four per cent, cut and polished diamonds and cut and polished gem stones to its 2.5 per cent and relaxation of credit norms for working capital requirements in the forthcoming budget. (BL) The government has floated a fresh manufacturing-linked solar tender with a smaller ticket size and fewer obligations after a previous attempt through a 10 GW auction fell flat. The cap on tariffs, which played a spoilsport in several recent tenders, is here to stay and is likely to be disputed again. (ET) Ahmedabad bankruptcy court turned down Essar Steel Asia Holdings Ltd bid to regain control over the bankruptcy ridden Essar Steel. (Mint) Dewan Housing Finance Ltd (DHFL) said that it has raised Rs13.75 bn from funds managed by Oaktree Capital Management, through securitization of loans. (Mint) NTPC Ltd plans to synchronise the 800 Mw unit of its 1600 Mw super thermal power station at Darlipalli, near Sundargarh, by March (BS) Yes Bank promoters Rana Kapoor and Madhu Kapur have agreed to nominate one representative director each on the bank's board as part of truce under the works, the private lender said. (ET) Larsen and Toubro Ltd plans to sell up to 3mn shares of L&T Technology Services, representing 2.89 per cent of its total paid up equity share capital. (BS) Former Indian Airlines Chairman Vishwapati Trivedi has stepped down from the Zee Media board in the wake of recent developments at parent Essel Group. (BS) Cyient Limited has informed that the meeting of the Board of Directors of the Company is scheduled on 1st Feb 2019 to consider and approve Board meeting to consider buyback (BSE) State Bank of India (SBI) is set to take an equity stake of at least 15 percent in Jet Airways India Ltd. as lenders to the carrier plan to convert part of their loans into equity, people with knowledge of the matter said. (Mint) JSW Steel and global trading firm Duferco are in advanced talks on a five-year cash-for-steel prepayment deal, four sources familiar with the matter said, in a rare move for the industry. (Mint) Financial turmoil at Jet Airways has begun to impact its operations with five aircraft getting grounded at various airports across the country on Tuesday and 19 flights getting cancelled. Lessors have moved to repossess these five aircraft leading to their grounding at Delhi, Mumbai, Bengaluru and Chennai. (ET) Natco Pharma said it has launched in India valsartan-sacubitril, a drug used for heart ailment, under its brand name Valsac. In doing so, the homegrown drug maker has set the stage for a patent challenge from Swiss drug maker Novartis, which is rapidly building on Vymada, its patented brand in India. (ET) What s Inside Result Update: Praj Industries & Chennai Petroleum Corporation Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group.

2 Result Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 165 / 72 Face Value (Rs) : 2 3M Avg. daily vol (Nos) : 3,975,558 Shares o/s (mn) : 182 Source: Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 9,235 11,229 13,098 Growth (%) (3.3) EBITDA ,363 EBITDA margin (%) PAT ,028 EPS EPS Growth (%) (11.4) BV (Rs/share) Dividend/share (Rs) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x) Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Dec-18 Jun-18 Mar-18 Promoters FII DII Others Source: Bloomberg, BSE Price Performance (%) (%) 1M 3M 6M Praj Industries Nifty (1.9) 3.9 (5.6) Source: Bloomberg Price chart (Rs) Jan-18 May-18 Sep-18 Jan-19 Source: Bloomberg Sanjeev Zarbade sanjeev.zarbade@kotak.com PRAJ INDUSTRIES LTD PRICE RS.128 TARGET RS.135 ADD Praj s performance has been on an improving track. The company reported all-round good performance with revenue and profits exceeding our estimates. Key Highlights The company posted robust increase in revenue of 33% y-o-y EBITDA margins expanded 170 bps on a y-o-y basis due to higher revenue booking The management is seeing an uptick in order enquiries, which is positive as it is looked as a precursor for future order intake Valuation and Outlook The Praj stock has been a strong outperformer in the third quarter on the back of government initiatives on higher ethanol blending with an objective to 1) conserve foreign exchange on crude imports 2) reduce environment pollution and 3) support the domestic sugar industry which has been reeling under unremunerative prices of sugar led by overproduction. As a result, order enquiries have improved and order intake has also gained traction. However, even after revising earnings upwards, we find at current valuations (35x and 22.1x FY19E and FY20E earnings respectively) these positives are fairly discounted into the stock price. Hence recommend ADD with a higher price target of Rs 135 (earlier Rs.108), valuing the stock at 23x FY20E. Quarterly performance (Rs mn) Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%) Net Sales Raw material cost Staff costs Other expenditure Forex loss/(gain) Total Expenditure PBIDT Depreciation Other Income EBIT Interest PBT Tax PAT EPS Rs PBDIT (%) Raw matl cost to sales (%) Staff cost to sales (%) Other expenditure to sales (%) Tax rate (%) Source: Company Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 Reported Vs Estimated performance (Rs mn) Reported Estimated Revenue EBITDA (%) 8.4% 8.9% PAT Source: Kotak Securities Private Client Research Result Highlights Consolidated revenue for Q3FY19 stood at Rs 3.3 bn (up 33% on y-o-y basis) due to a combination of sequential improvement in order book and higher execution rate. In earlier quarters, the management had been guiding that revenue growth would start gaining momentum in FY19. Even so, the revenue growth has been higher than our expectations. Gross margins for the quarter contracted by 80 bps y-o-y to 44.7%. Changes in gross margins are a function of project mix and segment mix. For the quarter, employee costs rose to Rs 402 mn vs Rs 354 mn on a y-o-y basis. Employee costs are expected to remain sedate due to reduction in headcount from 901 nos in FY17 to 884 in FY18. EBITDA margins for the quarter stood at 8.4% vs 6.7% on a y-o-y basis due to higher revenue booking leading to greater absorption of fixed costs. For the quarter, PAT stood at Rs 224 mn vs Rs 75 mn in the corresponding quarter of the previous fiscal. EBITDA margin (%) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Source: Company Order intake was healthy in comparison to earlier quarters Order intake grew 68% y-o-y to Rs 4.2 bn. As compared to earlier quarters, when the order intake would average ~ Rs bn per quarter, this is the fourth quarter of Rs3.0 bn plus order intake. Order intake mainly composes of Bioenergy (70% - mainly ethanol), Engineering business (19% - includes engineering products, breweries and water and waste water treatment) and HiPurity systems (11%- subsidiary of the company). Around 30% of orders came from overseas markets. We had mentioned in our earlier update that the company is seeing an uptick in order enquiries (up 35-40% y-o-y), which is a kind of harbinger so far as future order intake is concerned. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 Praj had in FY18 received design engineering orders for the first batch of three 2nd Gen (2G) BioRefineries, contracted by major oil marketing companies. We now understand that the company has completed the Design engineering work and it has also started receiving corresponding supply orders for the proprietary equipment for main plants. During the third quarter, the company received orders worth Rs 800 mn for critical plant packages from 2G plants. By and large, the management was optimistic on emerging scenario (sugar sector bailout package, 2G ethanol orders etc). The management is also positive on its subsidiary Praj Hi Purity Systems (PHPS) and expects the potential shift of API manufacturing from China to India to benefit the company. PHPS is into high purity water used mainly by the Pharma industry. Order book (Rs mn) Source: Company Industry developments The government in September 2018 released sugar bailout package which aims to help improve liquidity of Indian sugar industry through interest subvention on soft loans for augmenting ethanol production capacity and zero liquid discharge solutions The Cabinet Committee on Economic Affairs (CCEA) approved raising the exmill price of ethanol from different feedstock. This empowers sugar industry to determine optimal product mix, enhancement of distillery utilization and capacity augmentation. Ethanol procurement price Rs/Lit Current Earlier Sugar cane juice 59 na B Heavy molasses C Heavy molasses Source: Industry reports The new National Policy on Biofuels 2018 enhances economics and sustainability of distillery operations for Praj s existing and potential customers by - expanding the range of permitted feedstock for ethanol production, viability gap funding, additional tax incentives, higher purchase price for output for 2G ethanol Bio refineries. According to Indian Sugar Mills Association, a record 1.5 billion litres of ethanol worth over Rs 61 billion was lifted by oil marketing companies (OMCs in the ethanol supply year. For the new ethanol supply year , OMCs Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

5 have signed agreements to procure 2.6-billion litre ethanol, which is expected to improve the national blending in the ethanol supply year. Ethanol Procured by OMCs bn lit E 2.6 Source: ET Praj announced the ground-breaking of its first of its kind integrated demo plant of Compressed Bio-Gas (CBG). Praj unveiled its roadmap for commercialization of CBG technology and reaffirmed its readiness by way of required infrastructure to execute multiple CBG plants with advanced technology and designs. This can be a large opportunity in the long term if there is the requisite intent from the government. Ordering for bio gas CNG will start from March onwards, the management indicated. Conference call highlights The management indicated that the government is serious about the issue of pollution problem in cities (partly attributed to burning of agri-waste) and has lined up few more 2G greenfield plants. Praj will not have any role to play in the procurement of the feedstock for 2G ethanol plant but will guide the developers of the plant on feedstock selection. Margins are expected to be higher in the 2G ethanol project due to level of sophistication. Moreover, the company does not foresee the need to add manpower for delivering the BPCL as well as IOC 2G ethanol project. On the 1G ethanol (molasses to ethanol) opportunity, the management stated that the capex for a 120 klpd ethanol plant is of the order of Rs 1.2 bn, out of which the addressable opportunity for Praj is 30-40%, being the portion to be invested in Plant and Machinery. The management also stated that close to 55% of sugar companies have attached distillery while the rest being standalone distilleries. The management has guided for tax rate of 26% in FY19 The company has cash balance of Rs 3.5 bn (15% of market cap), part of which is attributed to client advances. Earnings Revision FY19 FY20 (Rs mn) Earlier Revised Earlier Revised Revenue EBITDA (%) EPS % change 7.8% 7.3% Source: Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 EPS (Rs/share) E 2016E 2017E 2018E 2019E 2020E Rating and Target Price The Praj stock has been a strong outperformer in the third quarter on the back of government initiatives on higher ethanol blending with an objective to 1) conserve foreign exchange on crude imports 2) reduce environment pollution and 3) support the domestic sugar industry which has been reeling under unremunerative prices of sugar led by overproduction. In September 2018, the Cabinet Committee on Economic Affairs also raised the procurement price of ethanol derived from 100 per cent sugarcane juice to Rs per litre from the earlier rate of Rs per litre. As a result, order enquiries have improved and order intake has also gained traction. However, even after revising earnings upwards, we find at current valuations (35x and 22.1x FY19E and FY20E earnings respectively) these positives are fairly discounted into the stock price. Hence recommend ADD with a higher price target of Rs 135, valuing the stock at 23x FY20E. Forward PE band for Praj Industries 160 Close -Unit Curr 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Source: Kotak Securities Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 Company Background Praj was incorporated in November 1985 as Praj Counseltech Pvt Ltd. It was promoted by a technocrat team comprising Mr. Pramod Chaudhari and associates. Praj is in the business of process design, engineering, fabrication, and commissioning of bio-fuels plants, brewery plants, waste water treatment plants, bio-consumables and process equipment and systems. While significant revenue comes from sale of ethanol process technology, plants, and equipment; and brewery plant and equipment, Praj is building a sizeable portfolio of business from water and wastewater treatment systems, high-purity systems, and critical process equipment. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 Financials: Consolidated Profit and Loss Statement (Rs mn) Revenues 9,552 9,235 11,229 13,098 % change YoY (6.0) (3.3) EBITDA ,363 % change YoY (35.1) (24.9) Other Income Depreciation EBIT ,118 % change YoY (42.3) (41.0) Net interest Profit before tax ,408 % change YoY (32.5) (30.9) Tax as % of PBT Profit after tax ,028 Minority interest Share of profit of associates Net income ,028 % change YoY Shares outstanding (m) EPS (reported) (Rs) CEPS (Rs) DPS (Rs) Balance sheet (Rs mn) Cash and cash equivalents ,182 Accounts receivable 2,949 2,625 3,500 3,500 Inventories 1, ,169 1,364 Loans and Adv & Others 2,352 1,704 2,352 2,352 Current assets 7,082 5,941 7,711 8,397 Misc exp. 1, LT investments 1,609 2,009 2,009 2,009 Net fixed assets 1,915 2,198 2,212 2,217 Def tax assets Total assets 11,874 11,208 12,993 13,684 Payables 4,395 3,635 5,000 5,000 Others Current liabilities 4,395 3,635 5,000 5,000 Provisions LT debt Min. int Equity Reserves 6,737 6,900 7,214 7,906 Total liabilities 11,874 11,208 12,993 13,684 BVPS (Rs) Cash flow Statement (Rs mn) PBDIT ,363 Direct tax paid (205) (135) (238) (380) Adjustments Cash flow from operations Net Change in Working Capital (244) 356 (413) (195) Net Cash from Operations Capital Expenditure (367) (250) (250) (250) Cash from investing 32 (239) Net Cash from Investing (335) (489) Interest paid (13) (11) (7) (10) Issue of Shares/(buyback) Dividends Paid (5) (336) (336) (336) Debt Raised (118) (43) - - Net cash from financing (136) (390) (343) (346) Net change in cash (114) 492 Free cash flow (40) 539 cash at end ,134 Deposits over 3 months Effect of exch rate cash as in balance sheet ,182 Ratio Analysis EBITDA margin (%) EBIT margin (%) Net profit margin (%) Receivables (days) Inventory (days) Sales/gross assets(x) Interest coverage (x) Debt/equity ratio(x) ROE (%) ROCE (%) EV/ Sales EV/EBITDA Price to earnings (P/E) Price to book value (P/B) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 Result Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 429 / 221 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 543,818 Shares o/s (m) : 149 Source: Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 441, , ,528 Growth (%) 8.8% 17.3% -2.8% EBITDA 21,184 8,105 19,824 EBITDA margin (%) 4.8% 1.6% 3.9% PAT 9, ,955 EPS EPS Growth (%) -12% -103% NM BV (Rs/share) Dividend/share (Rs) ROE (%) ROCE (%) P/E (x) 3.9 NM 4.0 EV/EBITDA (x) P/BV (x) Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Dec-18 Jun-18 Mar-18 Promoters FII DII Others Source: Bloomberg, BSE Price Performance (%) (%) 1M 3M 6M Chennai Pet (16.1) (7.5) (18.7) Nifty (1.9) 3.9 (5.6) Source: Bloomberg Price chart (Rs) Jan-18 May-18 Sep-18 Jan-1 Source: Bloomberg CHENNAI PETROLEUM CORPORATION LTD (CPCL) PRICE RS.243 TARGET RS.301 BUY Dismal Performance: CPCL reported higher than expected net loss. Lower capacity utilization level due to planned shut-down for maintenance, weak refining margins due to steep correction in product prices, implied inventory losses and higher operating cost impacted the performance during the quarter. We believe newly commissioned project will improve the earnings and weaker currency will be further positive. Major capex plans lined up which will boost its long term profitability, we opine. Key Highlights CPCL s average GRM stood at US$3.92/bbl in 9MFY19 as against US$ 6.64/bbl in 9MFY18 due to steep fall in product and crude oil prices. Operating cost per unit has increased to US$2.89/bbl (+22% qoq and 25% yoy) due to lower production. With the increase in production volume, we expect it to come down, going ahead. CPCL is currently implementing a number of projects to improve reliability, profitability and to meet product quality specifications. The total cost of these projects which are under implementation is estimated to be Rs.25.4 bn. Valuation & outlook We have revised our earnings to reflect 9MFY19 results and lower GRMs. Hence, we now expect CPCL to report an EPS of Rs.60 in FY20E (earlier Rs. 63) supported by better distillate yields, weaker INR/USD and higher crude throughput. At CMP, we believe that the stock is attractively valued at a PE of 4x FY20E earnings. We maintain BUY recommendation on the stock with a revised price target of Rs.301/share (earlier Rs.314/share). We have valued CPCL based on PE multiple of 5x FY20, which is at a significant discount to its peers. Quarterly performance table (Consolidated) Particulars (Rs Mn) Q3FY19 Q2FY18 Q3FY18 YoY (%) QoQ (%) Revenue 120, , ,333 6 (20) Incr/(Decr) in stock (4,870) 2,632 3,912 Total Expenditure 118, , , (21) EBIDTA (3,450) 2,438 8,343 Depreciation 1,105 1, EBIT (4,555) 1,362 7,492 Other income (87) (30) Interest-net 1,091 1,055 1, PBT (5,547) 447 7,215 Extra ordinary Exp/(Inc) (0.4) 50 Tax (1882) PAT (3,630) 236 3,920 (3,630) 236 Basic EPS (24.36) (24.36) 1.58 Source: Company. Sumit Pokharna sumit.pokharna@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 Quarterly result analysis Q3FY19 Revenue growth: CPCL s net revenue decreased 20% qoq to Rs.120 bn due to 21.4% qoq decrease in crude throughput and lower product prices. Crude throughput: CPCL reported lower crude throughput of 2.28 mmt, (- 21% qoq and -17% yoy) resulting in lower (75%) capacity utilization. Due to planned maintenance of the refinery the crude throughput was lower. From 6th Oct 18, CPCL had shut a 74,000 bopd crude unit at its 210,000 bpd Manali refinery for one month for maintenance. CPCL s crude throughput and capacity utilization Crude thruput (Mn MT)-LHS Capacity Utilisation (%)-RHS Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY Source: Company Implied refining margins: CPCL s implied GRMs stood lower at US$ (-) 1.07/bbl as against US$4.96/bbl in Q2FY19 partly due to steep fall in product and crude oil prices. Average GRM stood US$3.92/bbl in 9MFY19 as against US$ 6.64/bbl in 9MFY18. Raw material cost including purchases of finished goods: Raw material cost decreased 18% qoq to Rs.94.5 bn (+20% yoy) mainly due to decrease in crude oil prices, and lower crude throughput. In Q3FY19, average crude oil price decreased by 9% qoq to US$ 67.4/bbls. Employee cost: Staff cost has decreased 3% qoq to Rs.1.1 bn (-11% yoy). Employee cost to sales ratio (%) has increased 20 bps to 1%. Other expenses: CPCL s other expenditure decreased by 1% qoq to Rs.2.4 bn (+34% yoy). Operating cost per unit has increased to US$2.89/bbl (+22% qoq and 25% yoy) due to lower production. With the increase in production volume, we expect it to come down, going ahead. Operating profit: CPCL reported lower EBIDTA of Rs. (-) 3.45 bn in Q3FY19 as against Rs.8.34 bn in Q2FY18 on account of lower refining margins, lower sales volume, and inventory losses. Interest cost: CPCL s interest cost has increased by 3% qoq and 7% yoy to Rs.1.1 bn (includes preference dividend). Preference Shares are treated as financial liability as per Ind AS 32, as these are redeemable on maturity for a fixed determinable amount and carry fixed rate of dividend. Correspondingly, in line with the requirements of Ind AS 32, proportionate preference dividend including dividend distribution tax thereon, has been provisionally accrued as finance cost for Q3FY19. However, as per the Companies Act 2013, the preference shares are treated as part of share capital and the provisions of the Act relating to declaration of Preference Dividend at the end of the year would be applicable. Depreciation: In Q3FY19, depreciation cost increased 3% yoy to Rs bn (+30% qoq). Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

11 Other income: In Q3FY19, other income has decreased meaningfully 30% qoq (partly base effect) to Rs.99 mn (-87% yoy) party due to lower interest and dividend income earned. PAT: Multiple adverse factors impacted the quarterly profitability of CPCL. The company has reported a net loss of Rs.3.63 bn due to lower crude throughput, lower realization, lower other income and inventory losses. Key Developments Expansion Plans: IOC (promoter of CPCL) has indicated that Iran (Naftiran Intertrade, the Swiss subsidiary of National Iranian Oil Company, holds a 15.4% stake in CPCL) is looking to invest in CPCL for expansion and upgradation of its refinery. CPCL plans to shut down the 1 million tonne per year (i.e ~20,000 bbl/d) Nagapattinam refinery and replace it with a new 9 million tonne per annum unit (i.e ~1,80,000 bbl/d) over the next 5-6 years with an investment of around Rs bn (US$ 5.1 bn). CPCL plans to achieve financial closure of the refinery expansion in It also plans to build a petrochemicals plant of about mmtpa. We have not modeled the same as we await a financial closure. Future Projects: CPCL is currently implementing a number of projects to improve reliability, profitability and to meet product quality specifications. The total cost of these projects which are under implementation is estimated to be Rs.25.4 bn. With the completion of the new crude oil pipeline project, the BS-VI Project is likely to be completed in FY20. RLNG project is scheduled to be completed in phases from Nov 2018 onwards. CPCL is also planning to set up a 9 mmtpa refinery at Cauvery Basin, Nagapattinam at an estimated cost of Rs bn (plus or minus 30%). In principle approval has been obtained for this project. The proposed new project will play an important role in meeting future energy needs of Tamilnadu State. Preparation of detailed feasibility report is underway and is expected to be completed by March Maintain BUY We have revised our earnings to reflect 9MFY19 results and lower GRMs. Hence, we now expect CPCL to report an EPS of Rs.60 in FY20E (earlier Rs. 62.7) supported by better distillate yields, weaker INR/USD and higher crude throughput. At CMP, we believe that the stock is attractively valued at a PE of 4x FY20E earnings. We maintain BUY recommendation on the stock with a revised price target of Rs.301/share (earlier Rs.314/share). We have valued CPCL based on PE multiple of 5x FY20, which is at a significant discount to its peers. Valuation Particulars Unit FY20E EPS (FY20E) Rs./share 60.1 Target P/E x 5 Target price (Rs/share) Rs. Mn 301 CMP Rs. Mn 243 Potential upside/(downside) % 24 Source: Kotak Securities - Private Client Research Unit Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 Key Risk and Concerns: Wide fluctuations in crude, forex and product prices can impact the margins. If global fuel supply exceeds demand then margins can be under pressure and vice-versa. Any delay in executing the project can significantly impact the valuations. Large outlay for new projects exposes CPCL to significant project implementation risks Company Background Incorporated in 1965, Chennai Petroleum Corporation Limited (CPCL), formerly known as Madras Refineries Limited (MRL) was formed as a joint venture between the Government of India (74%, GoI), AMOCO (13%) and National Iranian Oil Company (13% equity stake) In 1985, AMOCO sold its equity stake to GOI and the shareholding pattern of GOI and NIOC changed to 84.62% and 15.38% respectively. Later in 1992, GOI disinvested 16.92% of the paid up capital in favor of Unit Trust of India, Mutual Funds, Insurance Companies and Banks, thereby reducing its holding to 67.7 %. CPCL came out with a public issue in 1994 wherein GoI and NIOC divested part of their equity stakes and CPCL's shares were listed on stock exchanges. As a part of the restructuring steps taken up by the Government of India, Indian Oil Corporation Ltd. acquired equity from GoI in FY In July 2003, NIOC transferred their entire shareholding to Naftiran Inter trade Company Limited, an affiliate, in line with the formation agreement, as part of their organizational restructuring. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

13 Financials: Consolidated Profit and Loss Statement (Rs mn) Revenues 406, , , ,528 % change YoY EBITDA 19,717 21,184 8,105 19,824 % change YoY Other Income Depreciation 2,786 3,402 4,326 4,480 EBIT 16,313 17,738 3,767 15,343 % change YoY Net interest 2,728 3,209 4,221 3,617 Profit before tax 13,585 14, ,726 % change YoY NM NM Tax 3,353 5, ,932 as % of PBT Profit after tax 10,232 9, ,795 Minority interest Share of profit of associates Net income 10,508 9, ,955 % change YoY NM Shares outstanding (m) EPS (reported) (Rs) CEPS (Rs) DPS (Rs) Balance sheet (Rs mn) Cash and cash equivalents Accounts receivable 10,397 15,695 17,034 16,554 Inventories 32,071 47,591 55,361 53,802 Loans and Adv & Others 5,738 4,928 4,985 4,971 Current assets 48,375 68,301 77,435 75,377 Misc exp LT investments 1,400 1,526 1,526 1,526 Net fixed assets 66,454 73,233 78,733 84,233 Total assets 116, , , ,136 Payables 16,522 44,437 54,223 52,396 Others 6,795 24,438 21,955 21,311 Current liabilities 23,316 68,875 76,177 73,707 Provisions 2,878 3,204 3,584 3,493 LT debt 54,978 28,890 36,082 36,387 Min. int and def tax liabilities 646 2,123 2,123 2,123 Equity 1,489 1,489 1,489 1,489 Reserves 32,921 38,480 38,238 43,937 Total liabilities 116, , , ,136 BVPS (Rs) Cash flow Statement (Rs mn) EBIT 16,313 17,738 3,767 15,343 Depreciation 2,786 3,402 4,326 4,480 Chg in working capital (11,851) 27,628 (1,271) (509) Chgs in other net current assets Operating cash flow 7,248 48,768 6,823 19,315 Interest (2,728) (3,209) (4,221) (3,617) Tax (3,353) (5,453) - (2,932) CF from operations 1,167 40,106 2,602 12,766 Capex (10,946) (10,181) (9,826) (9,980) (Inc)/dec in investments (1,258) (125) - - CF from investments (12,204) (10,307) (9,826) (9,980) others 4, (0) Increase/(decrease) in debt 9,372 (26,088) 7, Proceeds from share premium Dividends (3,519) (3,794) - (3,096) CF from financing 10,818 (29,882) 7,193 (2,791) Opening cash Closing cash Ratio Analysis EBITDA margin (%) EBIT margin (%) Net profit margin (%) (0.1) 1.8 Receivables (days) Inventory (days) Sales/gross assets(x) Interest coverage (x) Debt/equity ratio(x) ROE (%) NM 21.0 ROCE (%) EV/ Sales EV/EBITDA Price to earnings (P/E) NM 4.0 Price to book value (P/B) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13

14 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 15% returns over the next 12 months ACCUMULATE We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE We expect the stock to deliver -5% - +5% returns over the next 12 months SELL We expect the stock to deliver < -5% returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE We advise investor to subscribe to the IPO. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com deval.shah@kotak.com Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala, CFA Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com ledo.padinjarathala@kotak.com Teena Virmani Sumit Pokharna Pankaj Kumar Krishna Nain K. Kathirvelu Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap M&A, Corporate actions Support Executive teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com krishna.nain@kotak.com k.kathirvelu@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale Faisal Shaikh, CFTe Siddhesh Jain shrikant.chouhan@kotak.com amol.athawale@kotak.com Research Associate Research Associate faisalf.shaikh@kotak.com siddhesh.jain@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14

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