Cairn India (Q1 FY13)

Maintain BUY and revise 9-month price target to Rs380

January 01, 1970 5:30 IST | India Infoline News Service
        CMP Rs320, Target Rs380, Upside 18.6%
  • In-line topline growth, Mangala production increases to 150,000bopd and Bhagyam averages 25,000bopd
  • Rajasthan production to remain flat at 175,000bopd for at least couple of quarters
  • Realization for Rajasthan crude was at 7.3% discount to Brent, Management maintains its guidance of 10-15% discount to Brent
  • Company has guided for a capex of US$2bn spread over FY13 and FY14, inclusive of US$600mn for incremental Rajasthan exploration
  • Commencement of production from Aishwariya delayed from end of CY12 to end of FY13
  • OPM falls 686bps yoy and 300bps sequentially
  • Maintain BUY and revise 9-month price target to Rs380
Result table
(Rs m) Q1 FY13 Q1 FY12 % yoy Q4 FY12 % qoq
Net sales 44,400 37,127 19.6 36,513 21.6
Inc/(dec) in stock 180 (56) (419.1) 168 7.3
Personnel costs (322) (191) 68.5 (163) 97.1
Operating expense (8,718) (4,257) 104.8 (5,972) 46.0
Admin expense (619) (875) (29.2) (734) (15.6)
Operating profit 34,921 31,748 10.0 29,812 17.1
OPM (%) 78.7 85.5 (686) bps 81.6 (300) bps
Depreciation (4,373) (3,460) 26.4 (4,013) 9.0
Exploration w/off (352) (187) 88.0 (649) (45.8)
Interest (295) (446) (33.9) (305) (3.5)
Other income 964 528 82.7 923 4.5
Extra ordinary items 8,663 (8) - (2,170) -
PBT 39,528 28,175 40.3 23,598 67.5
Tax (1,271) (909) 39.8 (1,735) (26.8)
Effective tax rate (%) 3.2 3.2
Adjusted PAT 38,257 27,266 40.3 21,862 75.0
Adj. PAT margin (%) 86.2 73.4 1,273 bps 59.9 2,629 bps
Ann. EPS (Rs) 80.2 57.5 39.5 45.8 74.9
Source: Company, India Infoline Research

In-line topline numbers
Cairn India recorded net sales of Rs44.4bn for Q1 FY13 (in-line with estimates) as compared to Rs37.1bn in Q1 FY12 and Rs36.5bn in Q4 FY12. The jump was due to increase in production from the Rajasthan field and steep rupee depreciation both on a sequential and yoy basis.

During the quarter, working interest production volumes were at 127,226boepd v/s 99,640boepd in Q1 FY12 and 107,292boed in Q4 FY12. Production at the Mangala field was raised from 125,000 boepd in Q4 FY12 to 150,000boepd, while Bhagyam field operated at 25,000bopd for most part of the quarter. Realizations for the Rajasthan field were at an average discount of 7.3% to Brent. Overall realizations for crude oil were at 101/bbl in Q1 FY13 as compared to US$105.9/bbl in Q1 FY12 and US$109.3/bbl in Q4 FY12. Gas realizations were at US$4.5/mscf, flat on a yoy basis and 2.9% increase on a sequential basis.

OPM falls 686bps yoy and 300bps sequentially
Operating margins were lower by 686bps yoy and 300bps sequentially. Yoy decline was on the back of royalty costs and higher cess payments. Operating expenses as a percentage of sales was higher by 817bps yoy and 328bps qoq. While other income was higher by 83% yoy, forex gains of Rs8.7bn resulted in higher than expected net profit. Forex gains were on account of steep rupee depreciation impact on foreign exchange deposits of US$1.6bn and some dollar denominated receivables. The tax rate was lower on account of creation of deferred tax asset.

Key takeaways from the conference call

Financial updates
  • The company has guided for a capex of US$2bn net to Cairn India over FY13 and FY14
  • US$600mn for Rajasthan exploration (subject to government approvals)
  • US$600mn for Rajasthan development
  • US$800mn exploration in other assets and new investments in mature assets
  • Capex guidance is lower than the earlier estimates due to lower pipeline capex and some spillage over to FY15.
Update on Rajasthan field
  • Commencement of production at Aishwarya has been delayed from end of CY12 to end of FY13 due to delay in EPC contracts which have now been awarded.
  • Production at the Mangala field will continue to be at 150,000bopd and Bhagyam will continue to operate at 25,000bopd over the next six months before any further progress happens on capacity de-bottlenecking of the pipeline.
  • FDP on Barmer Hill is linked to JV approvals, and exploration approvals. FDP on Mangala will take at least couple of quarters.
  • Pipelines:
  • Phase 1: Till 240kbpd:
  • Plan A: Spend around US$100mn for additional pumps
  • Alternative economic plan B: Use drag resistant agents (DRA’s) which will involve minimal capex and help increase capacity till 240kbpd. For this plan, at least three months of testing is required. Eventually, if implemented, this plan will result in savings of US$100mn.
  • Phase 2: Till 300kbpd: Will need additional capex for pumps
Maintain BUY rating with a revised target price of Rs380
We are now more convinced of Cairn India achieving a higher than 175,000bopd of peak production over the medium term. Considering this, the stock currently seems to be factoring in a long term crude oil average price of US$75/bbl against our expectation of US$90/bbl. Additionally, the company has guided for a liberal dividend policy. Hence we maintain our BUY rating with a revised 9-month price target of Rs380.

Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 102,559 118,607 155,507 174,916
yoy growth (%) 541.4 15.6 31.1 12.5
Operating profit 84,117 95,532 125,363 140,619
OPM (%) 82.0 80.5 80.6 80.4
Pre-exceptional PAT 63,344 74,220 94,033 108,935
Reported PAT 63,344 79,377 94,033 108,935
yoy growth (%) 440.1 25.3 18.5 15.8

EPS (Rs) 32.4 38.9 49.3 57.1
P/E (x) 9.9 8.2 6.5 5.6
Price/Book (x) 1.6 1.3 1.1 0.9
EV/EBITDA (x) 7.2 5.6 3.8 2.8
Debt/Equity (x) 0.1 0.0 0.0 0.0
RoE (%) 17.1 16.8 17.7 17.3
RoCE (%) 18.1 18.2 20.9 20.1
Source: Company, India Infoline Research

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