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Cairn India Ltd: Higher output and weak rupee boost profits - Views on News from Equitymaster
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  • Apr 25, 2014 - Cairn India Ltd: Higher output and weak rupee boost profits

Cairn India Ltd: Higher output and weak rupee boost profits
Apr 25, 2014

Cairn India Ltd has announced results for the financial year 2013-14 (FY14) . The topline registered 7.1% year on year (YoY) growth during the year while bottomline was up by 4.3% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter grew by 15.7% year on year (YoY). For FY14, the revenues were up 7.1% YoY. This was despite lower realization, growth being driven by higher production and rupee depreciation.
  • The operating profits for the quarter grew by 27.3% YoY with margins at 72.9% (versus 66.3% in 4QFY13). For FY14, the operating profits grew by 5.0 % YoY with margins at 72.9%, down from 74.4% in FY13.
  • The firm registered a growth of 18.4% YoY in the bottomline during the quarter with net profit margins at 60.1% versus 58.8% in 4QFY13. For FY14, the net profits were up 3.1% YoY, with net profit margins at 66.3%, down from 68.8% in FY13.
  • The Board of Directors has announced a final dividend of Rs 6.5 per share. This is in addition to an interim dividend of Rs 6 per share.

Consolidated financial summary
Rs m 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 43,634 50,489 15.7% 175,242 187,617 7.1%
Expenditure 14,709 13,658 -7.1% 44,910 50,760 13.0%
Operating profit (EBDITA) 28,924 36,831 27.3% 130,332 136,857 5.0%
Operating profit margin (%) 66.3% 72.9%   74.4% 72.9%  
Other income 2,219 4,070 83.4% 7,228 7,637 5.6%
Interest 152 109 -28.3% 687 415 -39.6%
Depreciation 4,747 6,367 34.1% 18,459 22,974 24.5%
Profit before tax (before exceptional items) 26,246 34,426 31.2% 118,414 121,106 2.3%
Profit before tax margins (%)
before exceptional items
60.1% 68.2%   67.6% 64.5%  
Forex gain/(loss) -28 -2,431 nm 3,134 7,390 135.8%
Profit before tax 26,218 31,995 22.0% 121,548 128,496 5.7%
Profit before tax margins (%) 60.1% 63.4%   69.4% 68.5%  
Tax 582 1,641 182.0% 2,351 4,178 77.7%
Profit after tax  25,636 30,354 18.4% 119,197 124,318 4.3%
PAT after impact of scheme of arranegement for earlier periods 25,636 30,354   120,564 124,318 3.1%
Net profit margins (%) 58.8% 60.1%   68.8% 66.3%  
No. of shares         1,908  
Diluted earnings per share (Rs)         65.2  
P/E ratio (x)         5.1  
*based on trailing 12 months earnings

What has driven performance in FY14?
  • The growth in the revenues (post profit sharing with the Government of India and royalty expense in Rajasthan block) was despite a slight decline in realizations and higher profit sharing with the Government, mainly on account of higher production (up around 7% YoY and depreciation in the rupee (more than 10%). The gross average production in FY14 stood at 219 kilo barrel oil equivalent per day (kboeod), up from 205 kboepd in FY13. Average crude realization stood at US$ 95.8 per barrel

  • The operating profits (excluding other income) for the year grew by 5% YoY. Cairn India is one of the lowest cost operators and the operational cost in onshore RJ block stood at US$ 3.9 per barrel. The operating profit margins declined during the year by 1.4% (YoY) mainly due to an increase in production expenses, on the back of higher production from Rajasthan block and increased maintenance and operation activities. The employee expenses for the year were also higher (up 166% YoY) due to change in the measurement of outstanding stock option liabilities using Fair Value method versus the previously followed intrinsic value method.

    Cost breakup
    Rs m 4QFY13 4QFY14 Change FY13 FY14 Change
    Production expenses 2,967 3,392 14.3% 8,237 11,600 40.8%
    as a % of sales 6.8% 6.7%   4.7% 6.2%  
    Employee benefit expenses 196 474 142.2% 1,033 2,741 165.5%
    as a % of sales 0.4% 0.9%   0.6% 1.5%  
    Statutory levies 6,874 6,835 -0.6% 28,077 28,986 3.2%
    as a % of sales 15.8% 13.5%   16.0% 15.4%  
    Other costs 1,016 1,349 32.8% 3,015 3,309 9.7%
    as a % of sales 2.3% 2.7%   1.7% 1.8%  
    Exploration costs w/off 3,657 1,608 -56.0% 4,549 4,124 -9.3%
    as a % of sales 8.4% 3.2%   2.6% 2.2%  
    Total costs 14,709 13,658 -7.1% 44,910 50,760 13.0%
    as a % of sales 33.7% 27.1%   25.6% 27.1%  

  • The net profit for the year grew by 3.1% YoY. While higher forex gain (due to rupee depreciation against the dollar) boosted the bottomline, the gains were offset by higher depreciation, depletion and amortization costs on account of high exploration activity.
    What to expect?
    During the year, the company has drilled 50% of gross risked prospective resources in the fiscal year as planned, has established 6 discoveries and added 1 billion barrels of oil and gas in place (initial estimates). The gross capex for the year stood at US$ 899 m of which 41% was related to exploration and balance to development.

    Going forward, the company's focus will be mainly on development activities across assets. Of the net planned capex of US$ 3 bn by FY17, the company expects 81% to be carried out in first two years. The company further aims to achieve a reserve replacement ratio of 150% in the next three years. However, this will be subject to extension of production sharing contract till 2030. Further, the management has given a guidance of 7%-10% growth in average annual production from known discoveries over three years. However, for FY15, the production is likely to be flat due to the decline in Mangala ( as enhanced recovery measures will take some more time to deliver).

    So far, the company has not seen much success with the Buyback plan. The production guidance for current fiscal year is disappointing. Any further slowdown in the production (lower than the guidance), weakness in crude oil prices or rupee appreciation will have adverse impact on Cairn India.

    At the current price of Rs 335, the stock of Cairn India is trading at a price to earnings multiple of 5.1 times our estimated FY16 earnings. We maintain our view to Buy the stock at lower prices.

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