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Cairn India: Bottomline in the red - Views on News from Equitymaster
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Cairn India: Bottomline in the red
Apr 28, 2015

Cairn India Ltd has announced results for the quarter and the year ended March 2015. The topline registered 47% decline on a year on year (YoY) basis during the quarter while exceptional costs led to losses at the bottomline level. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 47.0% year on year (YoY). Revenue for the year decline 22% YoY on the back of slump in crude prices.
  • The operating profits for the quarter declined by 78.6% YoY, with margins at 29.4% versus 72.9% in 4QFY14.
  • The company reported net loss of Rs 2.4 bn for the quarter . For full year, net profit declined by 64% YoY.
  • The company has recommended a final dividend of Rs 4 per equity share (total dividend at Rs 9 per share). Along with interim dividend, the total dividend payout for the year stands at 44.57%.

Consolidated financial snapshot
Rs m 4QFY14 4QFY15 Change FY14 FY15 Change
Sales 50,489 26,772 -47.0% 187,617 146,462 -21.9%
Expenditure 13,658 18,894 38.3% 50,760 61,236 20.6%
Operating profit (EBDITA) 36,831 7,878 -78.6% 136,857 85,226 -37.7%
Operating profit margin (%) 72.9% 29.4%   72.9% 58.2%  
Other income 4,070 3,576 -12.1% 7,637 12,849 68.3%
Interest 109 51 -52.7% 414.8 203.4 -51.0%
Depreciation 6,367 2,560 -59.8% 22,974 25,695 11.8%
Forex gain/(loss) -2,431 -1,683   7,390 5,244  
Profit before tax 31,995 7,159 -77.6% 128,496 77,421 -39.7%
Profit before tax margins (%) 63.37% 26.74%   68.49% 52.86%  
Tax 1,641 4,516 175.2% 4,178 6,295 50.7%
Effective tax rate (%) 5.1% 63.1%   3.3% 8.1%  
Profit after tax  before exceptional items 30,354 2,644 -91.3% 124,318 71,126 -42.8%
Net profit margins before exceptional items (%) 60.1% 9.9%   66.3% 48.6%  
Exceptional items net of tax 0 5,052 nm 0 26,330 nm
Net profits post exceptional items 30,354 -2,408 nm 124,318 44,796 -64.0%
Net profit margins post exceptional items(%) 60.1% -9.0%   66.3% 30.6%  
No. of shares         1875  
Diluted earnings per share (Rs)*       66.3 23.9  
P/E ratio* (x)         8.7  
*Book value as on 31st March 2015

What has driven performance in 2QFY15?
  • The net revenues declined 47% mainly on account of fall in crude prices. The average daily production for the quarter declined by 4% YoY (3% decline in oil production and 17% YoY decline in gas production).

  • For full year, the revenues declined by 22% YoY on the back of lower realizations (down 20% YoY) and around 3% YoY decline in the production (2% YoY decline in oil and 27% YoY decline in gas production). The average crude price realization for the year stood at US$ 76.4 per barrel from the Rajasthan block.

  • Operating margins for the quarter declined to 29.4% from 72.9% in 4QFY14 on account of sharp surge in exploration costs written off in Rajasthan and increase in the production expenses. The operating expense in Rajasthan came in at US$ 5.8 per barrel oil equivalent (boe).

  • The bottomline of the company slipped into the red on account of write offs. The company also faced a forex loss of Rs 1.7 bn (versus a loss of Rs 2.4 bn in 4QFY14). Higher effective tax rate also impacted the bottomline. However, DDA expenses declined by around 60% YoY during the quarter.

    Cost breakup
    Rs m 4QFY14 4QFY15 Change FY14 FY15 Change
    Production expenses 3,392 5,559 63.9% 11,600 17,661 52.2%
    as a % of sales 6.7% 20.8%   6.2% 12.1%  
    Employee benefit expenses 474 302 -36.3% 2741 1105 -59.7%
    as a % of sales 0.9% 1.1%   1.5% 0.8%  
    Statutory levies 6,835 6,868 0.5% 28,986 27,994 -3.4%
    as a % of sales 13.5% 25.7%   15.4% 19.1%  
    Other costs 1,349 643 -52.3% 3,309 3,495 5.6%
    as a % of sales 2.7% 2.4%   1.8% 2.4%  
    Exploration costs w/off 1,608 5,522 243.4% 4,124 10,980 166.3%
    as a % of sales 3.2% 20.6%   2.2% 7.5%  
    Total costs 13,658 18,894 38.3% 50,760 61,236 20.6%
    as a % of sales 27.1% 70.6%   27.1% 41.8%  
What to expect?
For FY16, the company has said that despite low oil prices and cut in capex, it will at a minimum maintain FY15 production. For FY15, the actual production at Rajasthan field fell short of company's guidance (which suggested flattish production year on year). In a scenario of weak crude prices, the company will focus more on development projects than exploration projects. The cash balance at the end of FY15 stands at Rs 8.5 bn, down by around 52% YoY.

In another development, a demand of Rs 205 bn is alleged to be payable by the company and has been raised by Income Tax department for failure to deduct the withholding tax on alleged capital gains arising during 2006 -07 in the hands of Cairn UK Holdings Limited (CUHL), which is company's erstwhile parent company. The company has filed a petition against this in the Delhi High Court.

The stock is currently trading at trading twelve months price to earnings ratio of around 8.7 times. Considering the scenario of weak crude prices and lowered production guidance, we do not see operational triggers for Cairn in the near future. Further, cash utilization by the management remains a key concern. We recommend investors to avoid buying the stock at current prices.

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