Chennai Petroleum Corporation Ltd is HDFC Securities’ pick of the week. The research firm has a target price of Rs 579 on the shares of Chennai Petroleum Corporation. The shares closed at Rs 461 on NSE this afternoon, up by more than 3.1% since yesterday’s close. The research firm’s target implies an upside of more than 25% from the current market prices. HDFC Securities said in its report, “Buoyant GRM and efforts to reduce working capital could help achieve better profitability in FY19E. CPCL expects incremental GRM of USD1.0-1.5/bbl going forward post resid upgradation.”
In fact CPCL had reported better GRMs in 2017, despite disruptions such as floods and cyclones. “Despite disruption by floods/cyclone, FY17 numbers were good on account of higher production/distillate yield and better GRMs. We expect better throughput, GRM and utilisation for FY18E and FY19E for CPCL (despite some disruption in Manali refinery due to resid upgradation in Q2FY18 – compensated partly by higher inventory gains). Comparing with its nearest peer MRPL, CPCL is trading 28% discount on valuation front (EV/EBITDA multiple) for FY19E. CPCL also provides decent dividend yield of >5.5% (based on 30% payout) based on expected FY19E EPS and dividend,” noted the research firm in its report.
HDFC Securities says that the investors should look to add on dips. “We feel investors could buy the stock at the CMP and add on dips to Rs. 400-408 band (4.35xFY19E EV/EBITDA and 4.7x FY19E EPS) for sequential targets of Rs 512 (5.0xFY19E EV/EBITDA and 6.0x FY19E EPS) and 579 (5.4xFY19E EV/EBITDA and 6.7x FY19E EPS) over 4-6 quarters. At the CMP of Rs. 448 the stock trades at 4.6x FY19E EV/EBITDA and 5.2xFY19E EPS,” the firm said in its report. Notably, CPCL shares have returned more than 63% since January, while the BSE Midcap index has returned 35% in the same period. In the last three months alone, CPCL shares have returned more than 15%.