Fundamental Analysis And Intrinsic Value Of Chennai Petroleum Corporation Ltd.(2023)
In this article we will try to analyze Chennai Petroleum Corporation Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this Fundamental Analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the Intrinsic Value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.
Dated: 23 Jul 23
Company: Chennai Petroleum Corporation Ltd.
CMP: 443.25
Market Capitalization: 6595 Cr.
Intrinsic Value of Chennai Petroleum Corporation Ltd.
Chennai Petroleum Corporation Ltd. is in the business of refining crude and supply of petroleum products. The company is a part of Indian Oil Corporation group and derives significant operational benefits. Major contribution to its revenue comes from high speed diesel(contributing 45%). Rest of the portfolio comprises of motor spirit, heavy ends, automatic transmission fluid, naptha and other value added products. Bulk of the company’s output is sold through the IOC network.
Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.
Before we enter into the calculation of Intrinsic value of Chennai Petroleum Corporation Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.
Assumptions:
- Terminal growth rate is assumed to be 0%.
- Discount rate is assumed to be 12%.
- The increase in Free Cash Flow is assumed to be Rs. 352.18 crores per year for the first five years and then Rs 176.09 crores from sixth to tenth year. The growth rate is projected based on the past growth of Free Cash Flow (refer to figure below). In the past Free Cash Flow has increased at the rate of Rs. 704.37 crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Increase in Revenue is assumed to be Rs. 3594.39 crores per year for the first five years and then Rs 1797.20 crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 7188.78 crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Free cash flow will be 1% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.01. We assume that this ratio will hold good for future.
Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.
Free Cash Flow Growth Model
Intrinsic Value:Â Rs. 1301.27
Stock Entry price with 25% margin of safety: Rs. 975.96
Revenue Growth Model
Intrinsic Value: Rs. 520.43
Stock Entry price with 25% margin of safety: Rs. 390.32
The average of the above two stock entry prices works out to be Rs. 683.14. When the stock starts trading below this price it becomes attractive for long term investment.
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Fundamental Analysis Of Chennai Petroleum Corporation Ltd.
Leverage Ratios
Observations:
- The Company has shown a recovery from previous debt levels as can be seen from an improvement in debt equity ratio. The same is also indicated by an improvement in interest coverage ratio.
Operating Ratios
Observations:
- The company has been operating with a negative working capital turnover ratio throughout the period. A negative working capital indicates that the current liabilities of the company is more than its current assets. This may land up the company into short term cash crunch situation where it may have to rely on borrowings to meet immediate obligations.
- Receivable turnover ratio has shown improvement over pre COVID levels.
Profitability Ratios
Observations:
- Both PAT, PAT Margin and EBITDA and EBITDA Margin have shown improvement.
- In year 2019 the cost of raw materials shot up and accounted for higher input cost went up and the company made a loss despite increase in revenue over the previous year.
Author
Jibu Dharmapalan
Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.
References:
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