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Report Date 3rd April 2010

Company Name Chennai Petroleum Corp Ltd.

Price / Recommendation CMP 291 HOLD (Initiating Coverage)

Key Data

Company Background

Chennai Petroleum (CPCL), a subsidiary of Indian Oil Corporation Ltd, is a standalone refining company with dominanpresence in South India. Formerly known as Madras Refineries Ltd, CPCL has two refineries in Manali and CaveryBasin (Nagapattinam) with aggregate annual capacity of 10.5MMT.Manali refinery is the primary refinery with a capacity of 9.5MMTPA and produces fuels, lubricants, wax andpetrochemical feedstocks. Main products include LPG, motor spirit, aviation turbine fuel, High speed diesel, napthahexane, lube base stocks and others. In addition, CPCL has a wax plant with annual installed capacity of 30,000 tonnesand a propylene plant with an annual capacity of 17,000 tonnes.

Investment Rationale

Dividend paying stock: The stock has a long history of dividend payments. Since listing of the stock, thecompany skipped dividend payment for the first time in FY2009 which was a loss making year due to the globalrecession. The company had paid a dividend of 170% in FY2008. In FY2010, the company is expected to comeback to the dividend list.

Gross Refining Margins to strengthen: In recent past, GRM reached to its all time low. But now the worst isover, and with the global economy back on the growth path, we expect GRMs to stabilize at higher levels. HigherGRMs will boost the profits of the refinery.

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Cavery Basin Refinery to operate at full capacity: Due to lower availability of crude, Cavery Basin refinery isunderutilized. It is expected that the availability of crude will increase which will lead to full capacity utilization.

Peer Analysis

CPCL is a standalone refinery and its closest peer is MRPL. We have not considered Reliance Industries and Essar Oildue to their complexity in product portfolio which makes it quite different from CPCL.

Looking at EV/Production and EV/Installed Capacity, the CPCL stock is traded at a cheaper level than compared toMRPL.

Risk and Concerns

The refining margins change according to international market conditions for Crude and Refined Products.GRMs has been quite volatile of late and consequently fluctuations will impact the profits of the company.

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CPCL is a standalone refinery and a subsidiary of Indian Oil Corporation (IOCL) which is a public sectorcompany. IOCL is governed by the Indian Government policies. So any policy changes will have a bearing onCPCL.

Appreciation in Rupee in comparison to US Dollar will adversely affect GRM in Rupee terms.

Valuation and recommendation

The GRMs are expected to stabilize at a higher level and the global economic conditions expected to improve, weforesee a favourable impact on CPCL. This is available at a much lower cost when compared to MRPL. We expect thestock to return to dividend list and we recommend Hold for the stock.

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