Cairn India an underperformer: LKP

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Cairn India an underperformer: LKP

LKP has recommended an underperformer rating on Cairn India with a target of Rs 318 in its January 25, 2012 research report.

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LKP has recommended an underperformer rating on Cairn India with a target of Rs 318 in its January 25, 2012 research report.

"Cairn India , the topline for Q3 FY12 was reduced by $ 237 mn on account of royalty being made cost recoverable and profit sharing with the Govt. of India on production from the Rajasthan block. Adjustment towards royalty for the quarter stood at Rs 6,285 mn, 2% lower than our expectation of Rs 6,435 mn. Profit petroleum shared with the Govt. was Rs 5,727 mn, which has been calculated as 20% of profit petroleum for the quarter."

"In spite of blended realization jumping by 33% y-o-y from $ 76/boe in Q3 FY11 to $ 100.3/boe in Q3 FY12, revenue is flat y-o-y owing to royalty being made cost recoverable. The q-o-q rise of 17% in the topline is due to inclusion of one-off impact of royalty adjustment in Q2 FY12, inspite of stagnant production and marginally lower realization q-o-q. Mangala production for the quarter stood at 124.9 kbpd whereas the Saraswati field is producing at its peak level of 0.25 kbpd. Production from Bhagyam field has started on Jan 19, 2012 and the management has guided for ramp up of output to the approved peak level of 40 kbpd by Mar 2012. The company has retained its guidance for FY12 exit production rate of 175 kbpd. The company reported a forex gain of Rs 3 bn in Q3 FY12 due to the swift depreciation of the rupee against the US dollar. DD&A expense during the quarter stood at $ 8/bbl, which is in line with management guidance. Tax rate came in at 5% during Q3 FY12, as against 9.2% in Q3 FY11. The management has maintained its tax rate guidance at ~10%."

"As production from Rajasthan improves going forward, so would the profit sharing with the Govt., resulting in a higher portion of the operating cash flow being unavailable for the company. As the block is expected to produce at its peak level from FY14E-21E, revenues would be stagnant whereas profit shared with the Govt. would keep on increasing resulting in a lower topline y-o-y from FY14E onwards. On the other hand, operating costs would go up as opex/bbl for crude produced from EOR reserves is expected to be around $ 7/bbl as against $ 2.5/bbl currently. Hence, we expect the company to report its peak earnings in FY13E, and report lower earnings y-o-y going forward resulting in a series of lower cash flows going forward. With the stock rallying over the previous 3 months, our previous price target of Rs 334 has been achieved. We introduce our FY14 estimates and roll forward our price target from Mar 2012 to Mar 2013. As a consequence of falling cash flows from FY14E onwards, our price target drops to Rs 318 and we rate the stock as UNDERPERFORMER," says LKP research report. 

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