CAIRN INDIA: Co Gains in Situations where Peers Struggle

Exploration company Cairn India’s December quarter numbers were better than expected as improved realisations made up for the higher royalty burden. The company’s net sales as well as production volumes stagnated compared to the year-ago period. However, higher other income, gains on rupee depreciation and fall in interest costs pushed up its profits. It is set to achieve a jump of 40% in production by March-end.
Cairn’s net realisations improved 32% to $98.4 per barrel in the December quarter, even as total production fell 1.3% to 98,969 barrels of oil equivalent per day (boepd). However, this did not help it achieve any sales growth due to the additional burden of royalty and profit petroleum. The company paid a royalty of . 628.5 crore and . 573 crore of profit petroleum towards the Rajasthan block.
Unique conditions in the December quarter, which impacted Reliance Industries’ numbers, actually helped Cairn India. The December quarter saw a price differential between heavy and light crude oil grades falling to record levels due to weak naphtha and strong fuel oil prices. This sharply pulled up RIL’s refining margins and helped Cairn price its crude a little higher. As against a typical 10-15% discount to Brent, Cairn’s oil was sold at a discount of 8.3% during the December quarter. Although flat at the revenue level, the company gained from a three-fold jump in other income to . 112.4 crore and a twothird fall in interest cost to . 24 crore. Both these factors and a forex gain of . 301 crore helped it post a 13% growth in net profit at . 2,262 crore.
The company continues to remain debt-free with an ever growing cash pile which is $1.2 billion over and above its debt. Recently, it commenced production from the Bhagyam field in the Rajasthan block, which has an approved production limit of 40,000 barrels per day. With this, the company is in a position to move significantly close to its target production of 175,000 barrels per day by March-end, which will be a gain of 40% on its current production level.
At a time when the entire Indian petroleum industry is grappling with a number of problems — under-recoveries for the oil marketing companies, subsidy burden for public sector producers and low margins for standalone refiners — Cairn India remains the only company that is benefiting from the market conditions now. The Cairn stock is already at the level of the Vedanta Group’s acquisition price of . 355 and is currently trading at a price-to-earnings multiple (P/E) of 8.4, which is comparable with its peers ONGC and Oil India.