Chennai Petroleum: higher gross refining margins aid financials

Chennai Petroleum: higher gross refining margins aid financials

Higher gross refining margins (GRMs) boosted the financial performance of Chennai Petroleum Corp. Ltd (CPCL) in the March quarter. In general, the operating environment for refiners was strong during the quarter. Refining margin is the difference between the value of petroleum products produced by an oil refinery and the price of crude oil.

The company posted GRMs of $8.29 (around Rs376 today) per barrel against $4.27 a year ago. GRMs also improved from the December quarter, when they stood at $5.33 per barrel. GRMs for the March quarter include inventory gains as well.

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Higher GRMs boosted CPCL’s profitability. The company reported an operating profit of Rs581 crore against an operating loss of about Rs57 crore in the same period last year and an operating profit of Rs347 crore in the December quarter.

While the company’s profitability at the net level was strong both on a year-on-year basis and sequentially, interest costs have been substantially higher than Street estimates.

Interest expenses increased by 178% to Rs118 crore. Interest costs were higher as the company booked interest expenses on claims made by income-tax authorities on past taxes.

“CPCL is contesting the same in court and expects a positive decision by FY12-end. A positive decision will also result in write-back of income tax that has been booked in FY11 (based on conservative accounting)," wrote analysts from Edelweiss Securities Ltd in a results review note.

Nevertheless, the company’s net profit doubled to Rs314 crore compared with the December quarter and against a net loss in the year-ago quarter. For FY11 though, net profit has declined by 15% to Rs511 crore on account of decline in other income, higher interest expenses and sharp increase in the tax outgo.

The stock has disappointed investors in the last fiscal and has underperformed the BSE-500 Index and the oil and gas index of the Bombay Stock Exchange. One of the main concerns for the company is any adverse movement in refining margins.

CPCL should be able to deliver good results for the current quarter, given that refining environment has been decent so far.

Graphic by Paras Jain/ Mint

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