- Net sales at Rs44.4bn grew 67.5% yoy. It was 4.5% lower than estimates owing to lower than expected realizations.
- Realization for Rajasthan crude was seen lower at 10.8% discount to Brent. Management maintains its guidance of 10-15% discount to brent
- Mangala sustained production at 150,000bopd and Bhagyam averaged 25,000bopd. Rajasthan production expected to remain flat until Bhagyam ramps up to 40,000 bopd and Aishwarya commences production.
- Company has guided for a capex of US$2bn spread over next two years, with 60% of it to be spent in Rajasthan.
- Sri Lanka block phase-2 drilling to happen in mid CY13.
- OPM falls 165bps yoy and 97bps sequentially
- Maintain BUY with a 9-month price target of Rs380
|(Rs m)||Q2 FY13||Q2 FY12||% yoy||Q1 FY13||% qoq|
|Inc/(dec) in stock||76||37||104.0||180||(57.9)|
|OPM (%)||77.7||79.3||(165) bps||78.7||(97) bps|
|Extra ordinary items||(7,858)||(8,241)||(4.7)||8,663||(190.7)|
|Effective tax rate (%)||2.9||11.9||3.2|
|PAT margin (%)||52.3||28.8||-||86.2||-|
|Ann. EPS (Rs)||48.7||16.1||202.5||80.2||(39.3)|
Topline lower than estimates
Cairn India recorded net sales of Rs44.4bn for Q2 FY13 which was ~4.5% lower than our estimates. The crude realizations came in lower than our estimates on back of increased discount to the Brent (10.8% in Q2 FY13 vis-à-vis 7.3% in Q1 FY13). On a yoy comparison the topline grew a healthy 67.5% on back of increased production from Rajasthan block. During the quarter, working interest production volumes were at 129,431boepd v/s 99,220boepd in Q2 FY12 and 127,226boepd in Q1 FY13. The crude realization at US$98.1/bbl was 4.5% down yoy and the gas realizations at US$4.6/mscf were 2.2% higher yoy.
OPM falls 165bps yoy and 97bps sequentially
Operating margins were lower by 165bps yoy and 97bps sequentially. The decline in OPM on a yoy basis was attributed to royalty costs and higher cess payments. Other income came in exceptionally high at Rs2.2bn on back of one time income received (Rs1.17bn) through 10% divestment of stake in KG-DWN-98/2 block to JV partner ONGC. Pre-exceptional PAT was reported at Rs31.1bn, however forex losses made to the tune of Rs7.86bn (vis-à-vis a forex gain of Rs8.6bn in Q1 FY13) resulted in 39.3% qoq decline in reported PAT. The tax rate was lower on account of creation of deferred tax asset.
Key takeaways from the conference call
The company has guided for a capex of US$2bn net to Cairn India over FY13 and FY14
- US$1.2bn for Rajasthan of which 50:50 split would be done on exploration and development drilling.
- The remainder US$800mn would be spent on funding drilling activities in all other assets including the new South African orange basin.
- The pilot of using DRA (Drag reducing agents) for the purpose of pipeline de-bottlenecking has been successfully finished and the report has been submitted to the JV partner ONGC. Though the process involves some lead time, but will result in estimated savings of US$100mn in capex.
- The pipeline de-bottlenecking and production ramp up at Bhagyam is expected to happen simultaneously. Commencement of production at Aishwarya is expected in end of FY13.
- Meanwhile production at the Mangala field will continue to be at 150,000bopd and Bhagyam will continue to operate at 25,000bopd over next few months before any further progress happens on capacity de-bottlenecking of the pipeline.
- On the way ahead, management informs that approvals to increase production from Bhagyam and Aishwarya will be key triggers to reach to 240,000bopd levels, but beyond that it would be mainly on back of exploration success to reach the 300,000bopd mark.
- Nagalayanka: Two well appraisal program has been approved by JV partner ONGC.
- A 60% operator stake has been taken by Cairn India in Block 1 of Orange basin thereby diversifying its portfolio beyond India and Sri-Lanka. The block is almost twice the size of the original Rajasthan block. The transaction is presently undergoing regulatory approvals.
- Sri Lanka block: 600 sq km of 3D seismic data has been acquired and the phase two exploration will happen in 2013.
- Corporate restructuring has been approved by the judiciary and the company is presently undergoing the change. The management informed of a Board meeting on 30th October 2012 to consider an interim dividend.
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 9-month price target of Rs380.
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||541.4||15.6||31.1||12.5|
|yoy growth (%)||440.1||25.3||18.5||15.8|
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