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Cairn India (CAIR)
Energy
‘Royal’ty conundrum. Cairn reported weak 2QFY12 results with adjusted net income
at Rs7.2 bn (quarterly results not comparable) versus our estimate of Rs8.6 bn (adjusted
for one-off royalty payment). 2QFY12 results had multiple adjustments on account of
(1) royalty being treated as cost recoverable, (2) foreign exchange gain and (3) finance
charges. We have explained the impact of these one-off items later in the note. We
maintain our REDUCE rating on the stock given modest upside to our revised 12-month
target price of Rs300 (Rs295 previously).
2QFY12 results—not comparable due to several one-offs
Cairn reported 2QFY12 EBITDA at `21 bn (-33.7% qoq), versus our estimate of `27.8 bn. Crude
price realization was lower qoq at US$102.8/bbl (-2.9% qoq). Crude oil production from Rajasthan
block remained stable qoq at 125,251 b/d (gross basis). 2QFY12 gas realization was US$4.5/mcf
versus US$4.5/mcf in 1QFY12 and 2QFY11. The management highlighted that it expects to start
production from Bhagyam in 4QCY11 and Aishwariya in 2HCY12. However, the management was
diffident of achieving production beyond 175,000 b/d in the near term without augmentation of
infrastructure capacity.
And now the details of one-offs
(1) We note that 2QFY12 results had multiple adjustments on account of royalty becoming cost
recoverable. 2QFY12 reported net income of `7.6 bn included `13.6 bn of provision on account of
cost-recoverability of royalty for prior periods. (2) Other income increased sharply to `5.9 bn in
2QFY12, led by foreign exchange gain of `5.3 bn, which reflects the impact of rupee depreciation
on foreign currency-denominated deposits of US$1 bn. (3) Finance charges increased sharply to
`1.23 bn in 2QFY12 due to one-time charge of `0.83 bn on repayment of foreign currency loans.
Not a BUY unless we assume very high crude oil prices and/or recoverable reserves
We maintain our REDUCE rating on the stock with a target price of `300. We find it difficult to
build a case for investment in the stock at current levels unless we assume (1) very high crude oil
prices in perpetuity or (2) significantly higher recoverable reserves. We note that the current stock
price is discounting US$90/bbl in perpetuity. We also highlight that we already assume recoverable
reserves at 1.45 bn bbls from the Rajasthan block versus management guidance of 2P reserves of
1.15 bn bbls.
Fine-tuned earnings; retain REDUCE with a revised target price of `300
We have revised our FY2012-14E EPS to `41.8 (+3.4%), `50.6 (+2.6%) and `41.4 (+2.5%) to
reflect (1) 2QFY12 results, (2) revised exchange rate assumptions, (3) lower production from
Rajasthan field and (4) other minor changes. We retain our REDUCE rating on the stock with a 12-
month DCF-based target price of `300 (`295 previously) noting modest upside from current levels.
Decline in EBITDA due to cost recovery of royalty. Cairn India reported 2QFY12
consolidated net revenues at `26.5 bn (-28.6% qoq and -1.3% yoy) and EBITDA at `21
bn (-33.7% qoq and -2.2% yoy). The qoq decline in EBITDA reflects (1) royalty
adjustment of US$209 mn versus nil in the previous quarter and (2) lower crude price
realization for Rajasthan block at US$101.6/bbl versus US$104.9/bbl in 1QFY12. Gross
production from Rajasthan block remained steady qoq at 125,251 b/d (gross basis).
The discount to Dated Brent was ~US$11/bbl for the overall company and about
US$12/bbl for the Rajasthan block. Gas price realization was at US$4.5/mcf versus
US$4.5/mcf in 1QFY12.
Production remains steady for Rajasthan block. Cairn’s share of production from
Rajasthan block was at 87,676 boe/d (working interest-basis) in 2QFY12 versus 87,589
boe/d in 1QFY12. At CB-OS-2, gas production declined 5% qoq and oil production
declined 3.4% qoq. At Ravva, oil production declined by 11.5% qoq and gas production
increased by 25% qoq.
One-off impact of royalty being treated as a cost-recoverable item. We note that
2QFY12 reported earnings of `7.6 bn includes a one-off provision of `13.6 bn to account
for royalty being treated as cost-recoverable item for FY2010-11 and 1QFY12.
Sharp increase in other income. Cairn’s other income increased sharply to `5.9 bn
from `528 mn in 1QFY12 led by foreign exchange fluctuation gain of `5.3 bn,
which reflects the impact of rupee depreciation on its foreign currencydenominated
deposits of US$1 bn.
Increase in finance charges. Cairn India reported a sharp increase in finance cost
to `1.23 bn from `446 mn in 1QFY12, reflecting a one-time charge of `0.83 bn on
repayment of foreign currency loans.
DD&A charges decline 9.2% qoq. Cairn reported DD&A expense at `3.1 bn (-9.2%
qoq). The qoq decline in DD&A expenses was on account of lower exploration activities
due to monsoon. The management has guided DD&A expenses to be ~US$9/bbl in the
long term.
Taxation. The effective tax rate for the company was 5.3% in 1HFY12 which reflects
availing of MAT credit for `4.7 bn. The company booked a deferred tax asset of `0.2 bn
in 2QFY12 versus deferred tax liability of `0.3 bn in 1QFY12.
More on the royalty adjustment
We attempt to provide clarity on the adjustment on account of royalty being made cost
recoverable. We highlight that the impact is fairly complicated given that multiple variables
get impacted.
Gross revenues (A). Cairn’s gross revenues for 2QFY12 were at US862 mn. This
represents the gross revenues without any impact of royalty being made cost recoverable.
Royalty pertaining to 2QFY12. The total royalty for the Rajasthan block pertaining to
2QFY12 was US$171 mn and Cairn’s share of royalty (70%) was US$120 mn.
Royalty pertaining to prior periods. The gross royalty pertaining to prior periods for
the Rajasthan block was US$608 mn, Cairn’s share of the same was US$425 mn.
However, Cairn could have recovered only US$336 mn out of US$425 mn given the
insufficient level of revenues to recover the same. The remaining US$89 was carried
forward to 2QFY12.
Royalty impact taken in 2QFY12 (B). We highlight that the total royalty adjusted from
the revenues of 2QFY12 was US$209 mn. This includes (1) US$120 mn pertaining to
2QFY12 (A) and (2) US$89 which was carried forward from 1QFY12 as unrecovered
royalty.
Extraordinary item relating to prior periods. Cairn reported extraordinary item of
`13.6 bn (US$294 mn) in 2QFY12 relating to royalty adjustment for prior periods up to
(and including) 1QFY12. We note that US$336 was the total royalty that Cairn could have
recovered upto 1QFY12. However, the same has been netted for the profit petroleum of
US$42 mn that it paid to the government in 1QFY12. Thus, US$294 is the net
extraordinary item appearing in 2QFY12.
Net (adjusted) sales revenues for Cairn in 2QFY12. We note that the reported net
revenues of US$578 mn (`26.5 bn) represents (1) gross sales of US$862 mn (A) less (2)
royalty impact taken in 2QFY12 of US$209 mn (B) less (3) profit petroleum of US$75
attributable to the government.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
‘Royal’ty conundrum. Cairn reported weak 2QFY12 results with adjusted net income
at Rs7.2 bn (quarterly results not comparable) versus our estimate of Rs8.6 bn (adjusted
for one-off royalty payment). 2QFY12 results had multiple adjustments on account of
(1) royalty being treated as cost recoverable, (2) foreign exchange gain and (3) finance
charges. We have explained the impact of these one-off items later in the note. We
maintain our REDUCE rating on the stock given modest upside to our revised 12-month
target price of Rs300 (Rs295 previously).
2QFY12 results—not comparable due to several one-offs
Cairn reported 2QFY12 EBITDA at `21 bn (-33.7% qoq), versus our estimate of `27.8 bn. Crude
price realization was lower qoq at US$102.8/bbl (-2.9% qoq). Crude oil production from Rajasthan
block remained stable qoq at 125,251 b/d (gross basis). 2QFY12 gas realization was US$4.5/mcf
versus US$4.5/mcf in 1QFY12 and 2QFY11. The management highlighted that it expects to start
production from Bhagyam in 4QCY11 and Aishwariya in 2HCY12. However, the management was
diffident of achieving production beyond 175,000 b/d in the near term without augmentation of
infrastructure capacity.
And now the details of one-offs
(1) We note that 2QFY12 results had multiple adjustments on account of royalty becoming cost
recoverable. 2QFY12 reported net income of `7.6 bn included `13.6 bn of provision on account of
cost-recoverability of royalty for prior periods. (2) Other income increased sharply to `5.9 bn in
2QFY12, led by foreign exchange gain of `5.3 bn, which reflects the impact of rupee depreciation
on foreign currency-denominated deposits of US$1 bn. (3) Finance charges increased sharply to
`1.23 bn in 2QFY12 due to one-time charge of `0.83 bn on repayment of foreign currency loans.
Not a BUY unless we assume very high crude oil prices and/or recoverable reserves
We maintain our REDUCE rating on the stock with a target price of `300. We find it difficult to
build a case for investment in the stock at current levels unless we assume (1) very high crude oil
prices in perpetuity or (2) significantly higher recoverable reserves. We note that the current stock
price is discounting US$90/bbl in perpetuity. We also highlight that we already assume recoverable
reserves at 1.45 bn bbls from the Rajasthan block versus management guidance of 2P reserves of
1.15 bn bbls.
Fine-tuned earnings; retain REDUCE with a revised target price of `300
We have revised our FY2012-14E EPS to `41.8 (+3.4%), `50.6 (+2.6%) and `41.4 (+2.5%) to
reflect (1) 2QFY12 results, (2) revised exchange rate assumptions, (3) lower production from
Rajasthan field and (4) other minor changes. We retain our REDUCE rating on the stock with a 12-
month DCF-based target price of `300 (`295 previously) noting modest upside from current levels.
Decline in EBITDA due to cost recovery of royalty. Cairn India reported 2QFY12
consolidated net revenues at `26.5 bn (-28.6% qoq and -1.3% yoy) and EBITDA at `21
bn (-33.7% qoq and -2.2% yoy). The qoq decline in EBITDA reflects (1) royalty
adjustment of US$209 mn versus nil in the previous quarter and (2) lower crude price
realization for Rajasthan block at US$101.6/bbl versus US$104.9/bbl in 1QFY12. Gross
production from Rajasthan block remained steady qoq at 125,251 b/d (gross basis).
The discount to Dated Brent was ~US$11/bbl for the overall company and about
US$12/bbl for the Rajasthan block. Gas price realization was at US$4.5/mcf versus
US$4.5/mcf in 1QFY12.
Production remains steady for Rajasthan block. Cairn’s share of production from
Rajasthan block was at 87,676 boe/d (working interest-basis) in 2QFY12 versus 87,589
boe/d in 1QFY12. At CB-OS-2, gas production declined 5% qoq and oil production
declined 3.4% qoq. At Ravva, oil production declined by 11.5% qoq and gas production
increased by 25% qoq.
One-off impact of royalty being treated as a cost-recoverable item. We note that
2QFY12 reported earnings of `7.6 bn includes a one-off provision of `13.6 bn to account
for royalty being treated as cost-recoverable item for FY2010-11 and 1QFY12.
Sharp increase in other income. Cairn’s other income increased sharply to `5.9 bn
from `528 mn in 1QFY12 led by foreign exchange fluctuation gain of `5.3 bn,
which reflects the impact of rupee depreciation on its foreign currencydenominated
deposits of US$1 bn.
Increase in finance charges. Cairn India reported a sharp increase in finance cost
to `1.23 bn from `446 mn in 1QFY12, reflecting a one-time charge of `0.83 bn on
repayment of foreign currency loans.
DD&A charges decline 9.2% qoq. Cairn reported DD&A expense at `3.1 bn (-9.2%
qoq). The qoq decline in DD&A expenses was on account of lower exploration activities
due to monsoon. The management has guided DD&A expenses to be ~US$9/bbl in the
long term.
Taxation. The effective tax rate for the company was 5.3% in 1HFY12 which reflects
availing of MAT credit for `4.7 bn. The company booked a deferred tax asset of `0.2 bn
in 2QFY12 versus deferred tax liability of `0.3 bn in 1QFY12.
More on the royalty adjustment
We attempt to provide clarity on the adjustment on account of royalty being made cost
recoverable. We highlight that the impact is fairly complicated given that multiple variables
get impacted.
Gross revenues (A). Cairn’s gross revenues for 2QFY12 were at US862 mn. This
represents the gross revenues without any impact of royalty being made cost recoverable.
Royalty pertaining to 2QFY12. The total royalty for the Rajasthan block pertaining to
2QFY12 was US$171 mn and Cairn’s share of royalty (70%) was US$120 mn.
Royalty pertaining to prior periods. The gross royalty pertaining to prior periods for
the Rajasthan block was US$608 mn, Cairn’s share of the same was US$425 mn.
However, Cairn could have recovered only US$336 mn out of US$425 mn given the
insufficient level of revenues to recover the same. The remaining US$89 was carried
forward to 2QFY12.
Royalty impact taken in 2QFY12 (B). We highlight that the total royalty adjusted from
the revenues of 2QFY12 was US$209 mn. This includes (1) US$120 mn pertaining to
2QFY12 (A) and (2) US$89 which was carried forward from 1QFY12 as unrecovered
royalty.
Extraordinary item relating to prior periods. Cairn reported extraordinary item of
`13.6 bn (US$294 mn) in 2QFY12 relating to royalty adjustment for prior periods up to
(and including) 1QFY12. We note that US$336 was the total royalty that Cairn could have
recovered upto 1QFY12. However, the same has been netted for the profit petroleum of
US$42 mn that it paid to the government in 1QFY12. Thus, US$294 is the net
extraordinary item appearing in 2QFY12.
Net (adjusted) sales revenues for Cairn in 2QFY12. We note that the reported net
revenues of US$578 mn (`26.5 bn) represents (1) gross sales of US$862 mn (A) less (2)
royalty impact taken in 2QFY12 of US$209 mn (B) less (3) profit petroleum of US$75
attributable to the government.
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