Stock Review: Cairn India (CIL)

Higher production from Rajasthan fields, good realisations and MAT credit entitlement enabled Cairn India (CIL) to post higher than expected results for the October-December quarter. Despite a jump in crude prices, which should have reflected positively on the stock, the scrip has lost five per cent since August due to the uncertainty over its stake sale to Vedanta. While royalty and regulatory hurdles around the deal will be the key factors that will have a bearing on the CIL stock in the near term, the company is expected to post handsome earnings growth. CIL has untapped exploratory upside opportunities across various fields and the finalisation of the Vedanta deal will only speed-up this process. Analysts have pegged its sum-of-the-parts valuation at Rs 312-350, which given its price of Rs 319, offers little upside. However, if the deal gets the government nod and crude oil prices stay around the current levels, the stock could see an up move.

No deal yet

The CIL management has stated that it will not accept any condition tied to the Vedanta deal that can negatively impact the value of the company or hurt minority shareholders. However, the royalty issue will remain an overhang on the Cairn India stock in the near-term, believe analysts. ONGC, the JV partner of CIL in Rajasthan fields is asking the oil ministry to consider royalty as a recoverable cost. If this is done, CIL will have to bear its share of royalty burden. Analysts at Angel Broking expect a dip of Rs 40-50 per share in the valuation of CIL if royalty borne on Rajasthan fields becomes cost-recoverable. Most brokerages have a neutral/hold rating on the stock as they believe all the news is already priced in the stock making it fairly valued.

Q3 snapshot

For the Oct-Dec quarter, Cairn's revenue growth was driven by robust volumes and realisations on the back of higher sales from the Mangala field. Production during the quarter grew by 307.6 per cent yoy to 100,270 barrels of oil equivalent per day (boepd) due to production ramp up at the Rajasthan fields. While production of crude at the Rajasthan field stands at 125,000 boepd, CIL is awaiting government and JV approval to ramp it up to 150,000 boepd. The blended realisations for the quarter expanded by 15 per cent on a yearon-year basis to $74.3/boe, led by higher share of crude oil in the revenue mix due to production ramp up at the Mangala field. Average oil price realisations were up by 7.4 per cent to $75.9/barrel, whereas gas price realisations stood flat at $4.5/mmbtu.

Bottomline growth was fuelled by MAT credit entitlement of Rs 340 crore in the quarter coupled with lower exploration costs (down 49 per cent ). Also, lower interest costs (down 42 per cent ) aided the net profit for the quarter gone by. Exploration cost fell due to slowdown in exploration caused by delays in approvals. However, interest expense grew on a year-on-year basis by 185.5 per cent due to capitalisation of debt related to pipeline and newly commissioned fields. The operating margin (OPM) expanded by 394 basis points qoq owing to a better revenue mix (growing share of crude oil).