MF Tracker: One of the most ‘unloved’ stocks this fiscal has surged over 110% so far

MF Tracker: One of the most ‘unloved’ stocks this fiscal has surged over 110% so far

Certainly, here’s an expanded discussion of the story of Chennai Petroleum Corporation Ltd (CPCL) and its implications:

The tale of CPCL is a vivid illustration of the complexities and unpredictabilities in the world of stock investing:

At the end of March, mutual funds collectively held a meager 0.80 percent stake worth Rs 28.20 crore in CPCL. This modest interest in the company may have been due to its status as a small-cap firm, which can often be overlooked by larger investors.

Remarkably, only two fund houses, ITI MF and ICICI Prudential MF, had any exposure to CPCL. The limited presence of professional fund managers in the stock suggests that CPCL was not a widely recognized or favored choice among institutional investors.

However, the story took an unexpected turn in April. As the new fiscal year began, even these two fund houses chose to completely exit their positions in CPCL. This decision was notable because it indicated that even experienced and well-resourced fund managers can sometimes make investment choices that don’t align with market developments.

Despite the initial lack of interest and the professional fund exits, CPCL started to gain momentum during the fiscal year. In fact, it more than doubled in value, comprehensively outperforming all constituents of the BSE Oil and Gas index. This dramatic turnaround in CPCL’s fortunes highlighted the inherent unpredictability of the stock market and the potential for lesser-known or underappreciated stocks to deliver significant returns.

The stock’s closing at its 52-week high of Rs 535.90 on September 12 further emphasized its resurgence and the attention it garnered from investors. This impressive performance demonstrated that, in the stock market, sentiment can shift rapidly, and opportunities can emerge unexpectedly.

The CPCL story carries several valuable lessons for investors:

1.Market Uncertainty: Doubts about one’s stock-picking skills are not unique to individual investors; even professionals can face challenges in identifying winning stocks. Market uncertainty is a constant factor, and investors should remain adaptable and open to changing circumstances.

2. Diversification: Building a diversified investment portfolio can help mitigate the risks associated with individual stock picks. Even if some investments don’t perform as expected, a diversified portfolio can provide stability and potentially better overall returns.

3. Stay Informed: Staying informed about market developments, industry trends, and company-specific news is essential for making informed investment decisions. Keeping a finger on the pulse of the market can help investors spot opportunities and make timely adjustments to their portfolios.

4. Long-Term Perspective: Investing with a long-term perspective can help investors ride out short-term fluctuations and capitalize on the fundamental strengths of companies over time.

In conclusion, the CPCL story serves as a compelling reminder that stock market success is a multifaceted journey that involves a combination of research, adaptability, and patience. It underscores that even in the face of initial skepticism or indifference, stocks can experience remarkable turnarounds, and investors should remain open to unexpected opportunities.

Certainly, the adage “Price drives narrative” holds true in the world of financial markets, but it’s equally important to recognize that price movements can also shape investor behavior, as exemplified by the case of Chennai Petroleum Corporation Ltd (CPCL).

In May 2023, the mutual fund industry cautiously reentered CPCL, a stock that had previously seen minimal institutional interest. Shriram Mutual Fund acquired a small 0.01 percent stake for Rs 31 lakh, signaling a renewed interest in the company. This decision was influenced by the recent positive price performance of CPCL, demonstrating how rising stock prices can attract institutional investors back into a previously overlooked stock.

Following suit, ICICI Prudential Mutual Fund also re-entered the CPCL counter in the subsequent month, purchasing a 0.05 percent stake worth Rs 2.81 crore. This resurgence of mutual fund interest was, in large part, driven by the stock’s strengthening price trajectory.

Analysts have started to take a closer look at CPCL as well. Gagan Dixit, Senior VP of Oil, Gas, & Aviation at Elara Securities, noted that CPCL’s gross refining margins (GRMs) were expected to rise from around USD 11 per barrel in the June quarter to USD 15 per barrel in Q2. GRMs, a critical profitability metric for refiners, represent the difference between the cost of raw materials, primarily crude oil, and the weighted average prices of petroleum products. This upswing in GRMs amid sustained demand has piqued the interest of analysts and investors alike.

While Elara Securities currently maintains a ‘sell’ recommendation on CPCL, Dixit suggested that if the company can sustain GRMs above USD 15 for approximately two quarters, it could become a prime candidate for re-rating. This underscores how positive price movements can reshape perceptions and generate renewed interest in a stock, potentially leading to a shift in its valuation.

“One must also remember that the general sentiment around oil and gas stocks was negative at the start of this fiscal due to the pressure on crude prices following supply cuts by OPEC. But normalizing Russian and Chinese supplies have changed the situation somewhat,” added an industry expert.

Analysts have exercised caution regarding state-owned oil companies, primarily due to crude prices surpassing the USD 90 mark, which puts pressure on their marketing margins. However, Chennai Petroleum stands out as an exception because the company’s main products, such as LPG, motor spirit, aviation turbine fuel, and high-speed diesel, are marketed by its parent company, IOC (Indian Oil Corporation).

CPCL directly markets only specialty products like paraffin wax, mineral turpentine oil (MTO), hexane, and petrochemical feedstocks, which collectively account for just 8 percent of its sales.

Indian oil firms experienced an improvement in their Gross Refining Margins (GRMs) in FY23 as they imported low-cost Russian Ural crude and exported refined oil at higher prices to markets like Europe. However, the government introduced windfall profit taxes on crude oil producers in July, which was later extended to gasoline, diesel, and aviation fuel exports.

Earlier this year, a senior CPCL official announced plans to nearly double the processing of Russian oil in the current fiscal year 2023-24. In the previous fiscal year, CPCL processed about 1.4 million tonnes or 28,000 barrels per day (bpd) of Russian oil, equivalent to approximately 13% of its overall crude refining capacity, according to a Reuters report.

Rohit Kumar Agrawala, the company’s head of finance, stated in April that CPCL would continue to purchase Russian oil, provided there were no legal or compliance hurdles. During the previous fiscal year, the company purchased Russian oil at a discount, ranging from USD 3-4 per barrel to USD 7-8 per barrel compared to dated Brent, depending on market conditions.

Chennai Petroleum Corporation Limited (CPCL), originally known as Madras Refineries Limited (MRL), has a noteworthy history marked by significant changes in ownership and operational growth. Established in 1965, CPCL was formed as a joint venture involving the Government of India (GOI), AMOCO (formerly Standard Oil Company of Indiana), and the National Iranian Oil Company (NIOC).

In 1985, a significant shift occurred when AMOCO divested its equity stake in CPCL in favor of the Government of India. Subsequently, the Indian government made another pivotal decision in 2001 by transferring its equity in CPCL to the Indian Oil Corporation (IOC). This transition effectively transformed CPCL into a subsidiary of IOC, a major player in India’s oil and gas sector.

Today, CPCL has evolved significantly from its inception as a grassroots refinery with an initial installed refining capacity of 2.5 million metric tonnes per annum (MMTPA). It has grown to become one of the largest refining corporations in South India, boasting an impressive installed refining capacity of 10.5 MMTPA.

Furthermore, CPCL has expanded its reach and capabilities by engaging in a joint venture with IOC and other investors to construct a substantial 180,000 barrels per day (bpd) refinery located in the Cauvery Basin at Nagapattinam, Tamil Nadu.

Despite its historical transformations and expansion efforts, CPCL faced challenges in its financial performance, with its consolidated revenue witnessing a 34 percent decrease to Rs 17,985.67 crore in the June quarter compared to the previous year. The company’s net profit also experienced a significant decline, plunging by 76 percent year-on-year to Rs 556.5 crore. EBITDA (earnings before interest tax depreciation and amortization) declined by 72 percent to Rs 949.87 crore, leading to a contraction in its operating margin, which dropped to 5.3 percent from 12.4 percent in the previous year.

In terms of ownership, Indian Oil Corporation (IOC) holds the majority stake in CPCL, accounting for 51.89 percent of ownership. Additionally, notable investor Dolly Khanna held a 1.84 percent stake in CPCL as of the quarter ending June 2023. This diverse ownership landscape and CPCL’s historical journey reflect the dynamic nature of India’s petroleum industry and the evolving role of key players in the market.