Buy Cairn India; target of Rs 212: KRChoksey

KRChoksey research report on Cairn IndiaCairn India reported revenue of INR 2,242 crore, down 44% Y-o-Y; profit petroleum was INR 674 crore that includes profit petroleum for RJ block at INR 536 crore. Previous quarter profit petroleum was INR 521 crore that includes Rajasthan block profit petroleum at INR 398 crore. Production from DA1 was up 10% Y-o-Y and down 1% Q-o-Q at 147,443 bopd. Production from DA2 was down 28% Y-o-Y and 8% Q-o-Q at 20,683 bopd. EBITDA stood at INR 911 crore down 66% Y-o-Y and 29% Q-o-Q mainly due to higher production expenses of INR. 517 crore in Q2FY16 as compared to INR 486 crore in Q1FY16. The EBITDA margins came in lower at 41% down QoQ due to higher operating costs (increase in polymer injection volumes). Exploration cost write off stood at INR 68 crore down 49% Y-o-Y and 17% Q-o-Q as there was no exceptional write off this quarter. Operating costs at Rajasthan block stood at USD 5.5/bbl (compared to earlier costs of USD 5.2/bbl). Depreciation and Depletion charge for the quarter was at INR 864 crore, compared to INR 876 crore in Q1FY16, up 23% YoY and down 1% QoQ. Profit after Tax (before exceptional item) in Q2 FY16 was INR 673 crore, down by 70% YoY and 19% QoQ primarily due lower EBITDA and lower other income, which was partially offset by higher forex gain and lower tax. A favourable movement in the currency resulted into forex gain of INR 381 crore, a 109% QoQ increase. Other income declined by 68% QoQ to INR 120 crore due to timing difference in the maturity of investments and mark-to-market losses on bond investments. There was reversal of tax expense by INR 131 crore in the second quarter against charge of INR 141 crore in Q1FY16.The long term prospects of the company remain strong with the potential exploration upside of RJ block. However the near term performance of the stock will be under pressure due to flat production for FY16-17 from RJ fields, issues on cash utilization due to loan to Vedanta, lower realizations due to lower crude prices and PSC extension uncertainty. Cairn has scaled down FY16 capex from USD 1000m to USD 500m due to falling crude prices. Stock trades at 9.9x FY17 EPS of 15.5. We have valued Cairn’s core business (excluding cash and investments) @ INR. 116 per share based on DCF Model. Company has cash & cash equivalents of INR 17,943 crore (INR 96/share). Hence a merger with parent Vedanta remains unfavorable for minority shareholders and adds to the weight if crude prices increases. We maintain our BUY rating on stock with price objective of INR 212/share. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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