Cairn India – Q1FY14 Result Update :: LKP

Cairn India – Q1FY14 Result Update

Cairn’s Q1FY14 adjusted net profit of Rs24.5bn was lower than our estimate of Rs28.2bn on account of lower other income and higher exploration costs. Revenue for the quarter declined by 8.5% on annual basis to Rs40.6bn (qoq +6.9%) as profit petroleum pay out increased from 20% to 30% resulting additional outflow of Rs3.26bn. Average gross production for the quarter was at 212kboepd (yoy +2.6%, qoq +5.2%) while average oil price realization stood at $94.6/bbl (yoy -6.3%, qoq +6%). Production from Rajasthan fields increased by 3.8% yoy to 173.5kbpd (qoq +2.9%). Cairn is currently producing 180kbpd from its Rajasthan fields. The management guided Rajasthan exit production rate at 200-215kbpd for FY14, driven by production from Barmer Hill, NI and NE fields. We maintain our BUY rating on Cairn with a revised SOTP based target price of Rs366. At the CMP, the stock is trading at 6.2x and 3.9x FY15e EPS and EBITDA respectively.

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Valuation and view

We estimate Cairn to generate FCF to the tune of $2.5 over the next two years. We believe the street would follow closely the steps Cairn takes to deploy its FCF. Inability of the company to successfully deploy this huge cash pile could affect the return ratios and valuation of the company. However, we believe that most of the concerns that could affect Cairn’s valuations are priced in at the current price.

We value Cairn's business using NPV method to value its developing and producing assets while potential exploratory upside has been captured using EV/boe. We value its key Rajasthan fields at Rs219/share while we value exploration upside at Rs32/share.

We maintain our BUY rating on Cairn with a revised SOTP based target price of Rs366. At the CMP, the stock is trading at 6.2x and 3.9x FY15e EPS and EBITDA respectively.

Actual v/s Estimates

Y/E, Mar (Rs. m)	Q1FY14	Q4FY13	qoq (%)	Q1FY13	yoy (%)	LKP Estimates	Deviation (%/bps)
Revenue	40,629	43,634	-6.9%	44,400	-8.5%	42,940	-5.4%
EBITDA	30,099	32,582	-7.6%	34,921	-13.8%	32,872	-8.4%
EBITDA (%)	74.1%	74.7%	-59 bps	78.7%	-457 bps	76.6%	-247 bps
APAT	24,452	25,664	-4.7%	29,595	-17.4%	28,220	-13.4%
RPAT	31,272	25,636	22.0%	38,257	-18.3%	28,220	10.8%