Production ramp-up, increase in reserves hold key for Cairn India

Company's net profit stood at Rs 338.5 crore, up 46% y-o-y

Cairn India’s performance for quarter ending September 2013 was in line with expectations at the net profit level, but topline came in below expectations. While a favourable currency with rupee depreciating to record lows and crude oil prices spiking due to Syria conflict helped, a sharp increase in forex gain also boosted profits. Compared to the year ago quarter’s forex transaction loss of Rs 786 crore, Cairn reported a forex gain of Rs 429 crore. Thus, net profit at Rs 338.5 crore was up 46% year-on-year. Excluding these gains as well as other income contribution, profit before tax would have been almost flat at Rs 2,925 crore in the September 2013 quarter. The stock, thus, was down almost 5% to Rs 318 on Wednesday versus a% fall in the Sensex.

The average Rupee to dollar exchange stood at 62.10 in the September quarter compared to 55.8 in the June quarter and 55.1 in the year ago quarter. Besides, the Brent crude oil prices that were $103 a barrel at the start of the quarter shot up to $117 levels before cooling to $110 levels by the end of the quarter. In this backdrop, the company’s top-line increased by 4.7% year-on-year to Rs 4,650 crore, which was lower than consensus estimates of Rs 4,862 crore as many analysts were factoring in higher oil production.

Operational performance though was better with profits at Rs 3,481 crore (up 1.6% year-on-year) and margins higher at 74.9% helped by higher realisations and lower exploration costs. Cairn’s management observed that the Rajasthan Blocks realisations at $96 a barrel (at 13% discount to Brent prices) helped boost overall realisations.

Positively, Cairn India reiterated that its production remains on track and it will exit FY14 with a gross production of over 225,000 boepd (barrels of oil equivalent per day) including over 200,000 boepd from the Rajasthan block. For the quarter, the company’s gross production stood at 213,299 boepd, with the Rajasthan block contributing 175,478 boepd. In an analysts call post results, the company also said that the recently announced policy by the government on Integrated Field Development Plan will help reduce its field development timelines by 50%. This should help fast-track production as well as add to reserves in the longer-run.

In this backdrop and macro environment, the company’s prospects remain healthy, which is why most analysts are positive on the stock.

Rikesh Parikh VP - Institution Corporate Broking, Motilal Oswal Securities says, “We remain optimistic on Cairn on the back of steady crude oil prices and currency depreciation would support earnings, while management continues to guide for ramp up in production and higher pay out (interim Dividend of Rs 6 per share)”.

Bhavesh Chauhan at Angel Broking, too, maintains his Buy rating on the stock.

Of the 28 analysts polled by Bloomberg post the results on October 22, a whopping 25 have ‘Buy/Accumulate/Overweight’, two have a ‘Hold/Neutral’ and just one has a ‘Sell’ rating on the stock; the consensus target price being Rs 390.

However, the gains for the stock would depend on Cairn’s ability to meet its production guidance, and addition on its proven oil and gas reserves, something the markets will be closely monitoring.

Nitin Tiwari at Religare Capital Markets points out that increase in reserve base and utilisation of cash on the books remains the key for stock’s extraordinary performance. Cairn is a cash rich (and debt-free) company with Rs 18,319 crore of cash and equivalents at the end of September 2013 quarter. While the company has stated that it will distributed 20% of its profits as dividends, deployment of this cash towards exploration and production activities for higher returns should help boost confidence of investors.