Cairn India (Q3 FY13)

Maintain BUY with a 9-month price target of Rs380

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs340, Target Rs380, Upside 11.7%

  • Net sales at Rs42.8bn grew 38.1% yoy. It was lower than estimates owing to lower than expected realizations
  • Realization for Rajasthan crude was seen lower at 13% discount to Brent. Management maintains its guidance of 10-15% discount to brent Bhagyam production expected to be ramped up to 40,000bopd by H2 FY14
  • Approvals received for further exploration in the Rajasthan field, company plans to drill 100 wells over the next three years
  • Availability of rig has advanced exploratory drilling in Sri Lankan block by a quarter
  • Maintain BUY with a 9-month price target of Rs380
Result table
(Rs m) Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
Net sales 42,776 30,968 38.1 44,431 (3.7)
Inc/(dec) in stock (13) 114 (111.5) 76 (117.3)
Personnel costs (155) (273) (43.1) (360) (56.9)
Operating expense (9,021) (4,653) 93.9 (8,976) 0.5
Admin expense (725) (701) 3.5 (655) 10.7
Operating profit 32,862 25,456 29.1 34,516 (4.8)
OPM (%) 76.8 82.2 (538) bps 77.7 (86) bps
Depreciation (4,824) (3,787) 27.4 (4,515) 6.8
Exploration w/off (277) (1,763) (84.3) (262) 5.6
Interest (52) (240) (78.3) (188) (72.2)
Other income 1,819 1,124 61.9 2,226 (18.3)
Extra ordinary items 4,245 3,015 40.8 (7,858) (154.0)
PBT 33,772 23,803 41.9 23,918 41.2
Tax (323) (1,184) (72.7) (697) (53.6)
Effective tax rate (%) 1.0 5.0
PAT 33,449 22,619 47.9 23,222 44.0
PAT margin (%) 78.2 73.0 515 bps 52.3 2593 bps
Ann. EPS (Rs) 70.1 47.5 47.3 48.7 44.0
Source: Company, India Infoline Research

Topline lower than estimates
Cairn India recorded net sales of Rs42.8bn for Q3 FY13 which was lower than our estimates. The crude realizations came in lower than our expectations on back of increased discount to the Brent (13.3% in Q3 FY13 as against 10.8% in Q2 FY13 and 7.3% in Q1 FY13).  On a yoy comparison the topline grew a healthy 38.1% on back of increased production from Rajasthan block. During the quarter, working interest production volumes were at 128,058boepd v/s 98,969boepd in Q3 FY12 and 129,431boepd in Q2 FY13. The crude realization at US$94.9/bbl was down 4% yoy and the gas realizations at US$4.5/mscf were higher by 2% yoy.

OPM falls 538bps yoy and 86bps sequentially
Operating margins were lower by 538bps yoy and 86bps sequentially. The decline in OPM on a yoy basis was attributed to royalty costs and higher cess payments. Other income came in high at Rs1.8bn on back Rs1.7bn realized gain on foreign currency fluctuations. Pre-exceptional PAT was reported at Rs29.5bn, however unrealized forex gains of Rs2.4bn and Rs1.9bn adjustment towards The Scheme of Arrangement between Cairn and some of its wholly owned foreign subsidiaries whereby the Indian businesses of the said subsidiaries were to be transferred to Cairn resulted in 47.9% yoy jump in reported PAT. The tax rate was lower on account of creation of deferred tax asset.

Key takeaways from the conference call
  • Government of India (GoI) has decided to permit exploration in the development area
  • Pursuant to policy clarity on exploration, the Management committee (MC) has requested the JV to submit an exploration work programme for the RJ-ON-90/1 block
  • Target to drill the first exploration well by end FY13 and has plans to drill 100 wells over the next three years
  • The company has given a guidance of FY14 exit rate of production of 200,000-215,000bopd from the Rajasthan field. While 150,000bopd will be from Mangala, 40,000bopd will be from Bhagyam, 10,000bopd from Aishwariya, incremental 15,000bopd will be from the past discoveries for which Declaration of Commerciality has already been filed
  • Aishwariya field development on track; expect commencement of production by end FY13
  • Mangala EOR polymer pilot successful; full field implementation will result in plateau extension; EOR ASP pilot expected to begin by Q1 FY14
  • A total of 157 development wells have been drilled in Mangala so far and the remaining well count as per the FDP will be drilled in due course
  • The Bhagyam field is currently producing in a range of 20,000 to 25,000 bopd. Whilst the oil in place volumes in the field has been higher than expectations, the individual well deliverability has been below estimates due to the shallow nature of the reservoir and the inherent low energy system. The JV thus needs to drill additional wells in order to ramp up to the FDP approved peak rate. The FDP well count accounts for 81 wells, of which 66 are currently drilled, thus the JV has scheduled to drill the additional wells to get to optimal production rates in Bhagyam. The JV has received approval for 15 such wells from MC.
  • The gross cumulative Rajasthan development capital expenditure as on December 31, 2012 was US$3.7bn, of which US$99mn was spent during the quarter including US$17mn in DA 2.
  • Drilling of the phase 2 exploration well in the offshore SL 2007-01-001 block is advanced by a quarter; rig secured and spud planned in February 2013
  • A draft FDP for the Barmer Hill discovery has been prepared and is currently under discussions with the JV. The FDPs for the other discoveries are under preparation
Maintain BUY rating with a target price of Rs380
While some delays have cropped up in terms of near term ramping up of Bhagyam production but the company is confident of achieving the same by H2 FY14. Over the next one year, possible announcements such as reserve estimates in Sri Lanka block, new discoveries in Rajasthan field, utilization of huge cash on the balance sheet will be the triggers for the stock. Cairn continues to be one of our top picks in the oil & gas space. We maintain our BUY recommendation with a price target of Rs380.

Financial summary
Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenues 118,607 165,121 168,883 165,201
yoy growth (%) 15.6 39.2 2.3 (2.2)
Operating profit 95,532 124,691 122,750 115,398
OPM (%) 80.5 75.5 72.7 69.9
Pre-exceptional PAT 74,220 106,663 102,287 95,173
Reported PAT 79,377 112,663 102,287 95,173
yoy growth (%) 25.3 41.9 (9.2) (7.0)

EPS (Rs) 38.9 55.9 53.6 49.9
P/E (x) 8.7 6.1 6.3 6.8
Price/Book (x) 1.3 1.3 1.3 1.3
EV/EBITDA (x) 6.0 4.9 5.2 5.8
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 16.8 22.1 21.2 19.7
RoCE (%) 18.2 23.3 22.5 21.0
Source: Company, India Infoline Research

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