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CAIL reported 1Q12 EPS of Rs14.3, up 11% QoQ, but 4% below
our estimates. Despite higher oil prices, EBITDA was flat QoQ as
CAIL started sharing profit petroleum with the government.
Entitlement barrels are likely to have fallen c.9% QoQ.
● However, the quarter’s highlight was CAIL board’s decision to put
the government’s conditions on royalties and cess (as part of the
approval for the CNE/VED deal) to shareholders through a postal
ballot. As CNE/VED own far more than the simple majority
necessary, acceptance of the government’s conditions seems
very likely.
● We update our model for: (1) the FY11 annual report, (2)
acceptance of royalty and cess payments, (3) delays at Bhagyam
and (4) rolling forward of the DCF. Our TP falls to Rs342 (from
Rs388). FY12/FY13E EPS fall to Rs45 and Rs53, respectively.
● Beyond the near-term disappointment on loss of valuations for
minorities (we believe most of which is in the price), the market can
look positively at CAIL’s increasing production and crude price
leverage. Corporate strategy under new management (and use of
large cash) remains the key uncertainty. We maintain NEUTRAL.
CAIL’s 1QFY12 EPS at Rs14.3
Supported by strong crude prices, Cairn India reported 1Q FY12 EPS
of Rs14.3, up 11% sequentially but 4% below our estimates. While we
expected CAIL to pay profit petroleum to the government in 1Q, the
amount was higher than expected—we estimate net entitlement
barrels for CAIL fell by 9% QoQ. The Rajasthan field produced at 125
kbopd through the quarter, with crude realisations at c.US$104/bbl.
The discount to Brent was at the lower end of management’s
guidance. Cash flow from operations for the quarter was strong at
US$576 mn, and CAIL’s quarter-end net cash was at US$1.03 bn, up
US$374 mn QoQ. DD&A costs came down 25% QoQ to Rs3.5 bn
(due to one-offs in the previous quarter). Exploration costs fell 42%
QoQ to Rs187 mn (which helped reduce deferred tax liabilities).
Lower-than-expected tax rates (inclusive of MAT credit entitlements)
helped reported profits.
Rolling over on the government preconditions?
The government handed over the conditional approval letter to
CNE/CAIL on 26 July; CNE promptly asked CAIL to put the matter to
shareholders through a postal ballot. While the scheduled results
meeting lasted longer than expected (indicating some amount of
discussion), CAIL board has accepted CNE’s request to put the
government’s conditions to shareholders. As CNE and VED own far
more than the simple majority needed to pass such a resolution,
acceptance of the government’s preconditions (on royalty and cess
payments) now seems to be a matter of time. To some extent, this
ballot does away with the risk of public animosity between the
CNE/CAIL boards, but raises questions on the loss of valuations for
minorities (to facilitate a transaction between the two major
shareholders), despite CAIL management’s claims of strong legal
recourse against the government, and whether the CAIL board could
have done more to protect minority interests.
Update model
We update our model for: (1) the FY11 annual report, (2) acceptance
of royalty and cess payments, (3) delays at Bhagyam and (4) rolling
forward of the DCF. Our target price falls to Rs342 (from Rs388 ) and
would have been Rs400 if the royalties/cess were not accepted.
FY12E/FY13E EPS fall to Rs45 and Rs53, respectively.
We think CAIL’s period of uncertainty can continue for some time, as:
(1) the postal ballot process completes (with the preconditions most
likely approved), (2) the CNE/VED transaction closes and VED gains
control, and (3) regulatory approvals on output and drilling—that are
stuck now—are finally given. Beyond the near-term disappointment on
the valuation loss on royalties (which is already in the price, we
believe), the market can look positively at rapidly growing output (and
cash flow), with CAIL probably going back to tracking crude prices.
However, this may still be around two quarters away. Longer-term
corporate strategy (including use of cash) under new management will
remain a key uncertainty. We maintain NEUTRAL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAIL reported 1Q12 EPS of Rs14.3, up 11% QoQ, but 4% below
our estimates. Despite higher oil prices, EBITDA was flat QoQ as
CAIL started sharing profit petroleum with the government.
Entitlement barrels are likely to have fallen c.9% QoQ.
● However, the quarter’s highlight was CAIL board’s decision to put
the government’s conditions on royalties and cess (as part of the
approval for the CNE/VED deal) to shareholders through a postal
ballot. As CNE/VED own far more than the simple majority
necessary, acceptance of the government’s conditions seems
very likely.
● We update our model for: (1) the FY11 annual report, (2)
acceptance of royalty and cess payments, (3) delays at Bhagyam
and (4) rolling forward of the DCF. Our TP falls to Rs342 (from
Rs388). FY12/FY13E EPS fall to Rs45 and Rs53, respectively.
● Beyond the near-term disappointment on loss of valuations for
minorities (we believe most of which is in the price), the market can
look positively at CAIL’s increasing production and crude price
leverage. Corporate strategy under new management (and use of
large cash) remains the key uncertainty. We maintain NEUTRAL.
CAIL’s 1QFY12 EPS at Rs14.3
Supported by strong crude prices, Cairn India reported 1Q FY12 EPS
of Rs14.3, up 11% sequentially but 4% below our estimates. While we
expected CAIL to pay profit petroleum to the government in 1Q, the
amount was higher than expected—we estimate net entitlement
barrels for CAIL fell by 9% QoQ. The Rajasthan field produced at 125
kbopd through the quarter, with crude realisations at c.US$104/bbl.
The discount to Brent was at the lower end of management’s
guidance. Cash flow from operations for the quarter was strong at
US$576 mn, and CAIL’s quarter-end net cash was at US$1.03 bn, up
US$374 mn QoQ. DD&A costs came down 25% QoQ to Rs3.5 bn
(due to one-offs in the previous quarter). Exploration costs fell 42%
QoQ to Rs187 mn (which helped reduce deferred tax liabilities).
Lower-than-expected tax rates (inclusive of MAT credit entitlements)
helped reported profits.
Rolling over on the government preconditions?
The government handed over the conditional approval letter to
CNE/CAIL on 26 July; CNE promptly asked CAIL to put the matter to
shareholders through a postal ballot. While the scheduled results
meeting lasted longer than expected (indicating some amount of
discussion), CAIL board has accepted CNE’s request to put the
government’s conditions to shareholders. As CNE and VED own far
more than the simple majority needed to pass such a resolution,
acceptance of the government’s preconditions (on royalty and cess
payments) now seems to be a matter of time. To some extent, this
ballot does away with the risk of public animosity between the
CNE/CAIL boards, but raises questions on the loss of valuations for
minorities (to facilitate a transaction between the two major
shareholders), despite CAIL management’s claims of strong legal
recourse against the government, and whether the CAIL board could
have done more to protect minority interests.
Update model
We update our model for: (1) the FY11 annual report, (2) acceptance
of royalty and cess payments, (3) delays at Bhagyam and (4) rolling
forward of the DCF. Our target price falls to Rs342 (from Rs388 ) and
would have been Rs400 if the royalties/cess were not accepted.
FY12E/FY13E EPS fall to Rs45 and Rs53, respectively.
We think CAIL’s period of uncertainty can continue for some time, as:
(1) the postal ballot process completes (with the preconditions most
likely approved), (2) the CNE/VED transaction closes and VED gains
control, and (3) regulatory approvals on output and drilling—that are
stuck now—are finally given. Beyond the near-term disappointment on
the valuation loss on royalties (which is already in the price, we
believe), the market can look positively at rapidly growing output (and
cash flow), with CAIL probably going back to tracking crude prices.
However, this may still be around two quarters away. Longer-term
corporate strategy (including use of cash) under new management will
remain a key uncertainty. We maintain NEUTRAL.
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