Cairn - Q2FY13 Result Update - Centrum

Q2FY13 Result Update

Cairn

Buy

Target Price: Rs384

CMP: Rs338

Upside: 13.7%

Good news as maiden dividend is expected

Cairn’s operating performance was in line with adjusted PAT rising by 5.0% QoQ at Rs31.1bn yet forex losses led to 39.3% decline in reported PAT which came at Rs23.2bn. Rajasthan crude production grew by 2.8% QoQ at 171,801bpd while it fetched realisation of US$97.6/bbl (10.8% discount to Brent). Cairn’s corporate restructuring has been approved by the government post which the company board meeting is scheduled on 30 October for discussing maiden dividend. We believe this is the near term trigger for the stock.

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m  Rajasthan production to remain at 175,000bpd in Q3: Cairn’s Rajasthan crude production for Q2 averaged at 171,801bpd and the run rate of 175,000bpd is likely to be maintained for the current quarter. Gross production was flat sequentially at 207,245boepd with net interest for Cairn at 129,431boepd.

m  Rajasthan crude discount widens QoQ to 10.8%: Cairn fetched US$97.6/bbl for its Rajasthan crude which was at 10.8% discount to Brent (discount widened from 7.3% in Q1). Average crude realisation during Q2 remained at US$98.1/bbl, 2.9% down QoQ while average natural gas realisation was marginally up QoQ at US$4.6/mmbtu.

m  Other income boosted by asset sale; forex losses dampen bottom-line: Cairn’s field opex in Q2 stood at US$3.1/bbl while DDA stood at US$7.0/bbl.  The company received Rs1.2bn from asset sale of 10% interest in KG-DWN-98/2 thus boosting other income. However, rupee appreciation led to Rs7.9bn in forex losses. Thus even though the operating performance was in line, the reported PAT declined by 39.3% QoQ at Rs23.2bn in Q1 while adjusted for the forex losses the adjusted PAT actually went up by 5.0% QoQ at Rs31.1bn from Rs29.6bn in Q1.

m  Good news as dividend is coming: Cairn’s corporate restructuring has been approved by the government post which the company board meeting is scheduled on 30 October for discussing maiden dividend. The company has successfully completed pilot studies on drag reducing agents (DRAs), the application of which could enhance the pipeline capacity from current 175,000bpd to 240,000bpd. Pipeline capacity expansion is expected to coincide with the rise in crude production from Bhagyam and start up from Aishwariya. The company reiterated its production guidance that substantial part of 240,000bpd is expected to come in CY13. Cairn’s drilling activity is likely to gain momentum in CY13 with exploratory and development drilling across its assets including Barmer basin, Sri Lanka, KG onshore block and in matured assets. Based on management guidance, we have toned down our production estimates for FY13E and FY14E respectively. We remain optimistic on the growth prospects of the company and maintain our ‘Buy’ rating on the stock with a slightly revised price target of Rs384 (earlier Rs390).

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