Output Ramp-up Key to Cairn’s Profitability

Company’s price-to-earnings ratio of 5.6 looks attractive for long-term investors

Exploration firm Cairn India’s performance in the quarter to December 2012 exceeded expectations marginally as the company benefited from a weak rupee, while its production remained flat from the preceding quarter. Cairn India has emerged as a cash-rich firm and is working to improve its output level steadily over the next few quarters.
Cairn India’s net profit for the quarter was . 3,345 crore, which was 48% higher than the year-ago period driven by a 21% higher production at 205,014 barrels per day (bpd). Compared to the preceding quarter, when production was almost flat, the company’s profits were up 44%, mainly due to a weak rupee.
The company has turned into a cash-generating machine with its operations generating almost $0.5 billion of cash every quarter and its free cash exceeding $2.67 billion. Ramping up production from the current level holds the key to improving the company’s profitability. For this, Cairn plans to commence production from the Aishwariya field by the end of FY13.
Similarly, it plans to apply Enhanced Oil Recovery (EOR) techniques to entire Mangala field from the June ’13 quarter. Both these measures will help extend the plateau production.
Cairn India also appears to be making progress on the long-pending 80-km pipeline section between Salaya and Bhogat. Completion of this pipeline and the Bhogat terminal in the first half of 2013 will make the company’s crude oil truly international.
In the medium-to-long-term, it has a target to reach the 300,000-bpd level at the Rajasthan block to drive its growth. In that backdrop, the government’s decision to permit exploration in the development area is a big positive. Similarly, its exploration work is progressing well in Sri Lanka. Taking into account the December quarter results, Cairn India’s net profit for the past 12 months is now . 11,679 crore compared to its valuation of . 65,000 crore, which translates into a price-to-earnings ratio of 5.6. Long-term investors are likely to find this attractive, given the visibility on the company’s future growth.