Non-operational items hurt Cairn

Forex loss, lower other income cast a shadow on otherwise strong operating performance, well above Street expectations

On the face of it, Cairn’s December 2013 quarter results, declared after market hours on Thursday, seem to have met Street expectations. A closer look suggests it was better on the operational front.

Although consolidated net profit at Rs 2,884 crore (down 14 per cent over a year) was lower than Street expectations of Rs 2,900-3,100 crore, it was due to forex losses of Rs 129 crore, a higher tax rate and lower other income (down 23 per cent year-on-year to Rs 140 crore). In the year-before quarter, Cairn had reported a foreign exchange gain of Rs 236 crore; it was Rs 429 crore in the September 2013 quarter. More, increased exploration costs and a one-time charge due to adoption of a fair value methodology in stock option valuation, also impacted profit growth.

  However, the top line at Rs 5,000 crore was above the Bloomberg estimate of Rs 4,650 crore (up 17 per cent over a year and eight per cent over the September 2013 quarter). Ebitda (earnings before interest, taxes, depreciation and amortisation) at Rs 3,591 crore was also above the estimate of Rs 3,481 crore. The Ebitda margin, at 71.8 per cent, declined from the September quarter’s 76 per cent but this is understandable, with lower crude oil prices, the exchange rate and a slight rise in employee costs. Brent crude oil in the December quarter averaged $109 a barrel, compared to $111 in both the September 2013 and December 2012 quarters. Bhavesh Chauhan at Angel Broking says gross crude oil realisation was flat over a year, at $96.3 a barrel. The average dollar-rupee rate was 62 for the December quarter versus 62.5 in the September quarter.

A key positive was the increase in output from the Rajasthan block at 186,000 boepd (barrels of oil equivalent per day). This was up six per cent over the September quarterand took overall output to 224,493 boepd (up five per cent sequentially), the highest ever. The output was aided by better production from the Aishwarya fields. Notably, Cairn said it was likely to meet its forecast (‘guidance’) of exiting FY14 with an output of 200,000 boepd from the Rajasthan block and a little more than 225,000 boepd on an overall basis.

While the company continues to do well, there are no immediate surprises in the offering. The benefiting factors for Cairn India remain higher production, better crude oil prices and a favourable exchange rate. On production, analysts will be watching progress at the Barmer block in Rajasthan and other international assets. While exploration is progressing well in the Rajasthan block, clarity is awaited on further ramp-up. The international assets are likely to take a longer time to start production.  On the currency front, the rupee-dollar exchange rate is likely to remain in the 62-64 range, feel experts. The outlook for global crude oil prices remains benign, with supplies seen increasing from Iran, Libya, etc. Brent crude oil is, thus, likely to trade at close to $105 a barrel in FY15, with the long-term price outlook at $100 a barrel.

Meanwhile, Cairn started its open offer on Thursday. It proposes to buy back shares through the open market at not more than Rs 335 each and the total amount not exceeding Rs 5,725 crore, about 8.9 per cent of its equity capital. This move is likely to get some positives for it. Some analysts believe it is also likely to give Cairn Plc (Cairn India’s erstwhile promoter) an option to sell its remaining 10 per cent stake in the company. If successful, the open offer will prop the company’s core earnings per share and help reduce the overhang (of increased supply) in the counter. While the cash outgo of Rs 5,725 crore will reduce other income in the interim, it should help boost the core return ratios (on equity and capital employed). Notably, Cairn generates a little over Rs 1,000 crore in profits a month, which means the cash balance should get replenished in five or six months.

Given the fair value of the stock, which analysts peg at Rs 350-370, there is room for some upside. Chirag Dhaisule at LKP Securities, who had a target price of Rs 360-370, says he might upgrade the target price on the back of a higher rupee to dollar exchange rate of 60, versus lower rates used to model his estimates. Chauhan at Angel Broking maintains his ‘Buy’ rating on the stock after the results while he keeps his target price under review. The stock, however, could see further gains if Cairn reports significant hydrocarbon discoveries, likely in the medium term, as it is working on various potential assets.