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Cairn India: New depreciation policy pulls bottomline - Views on News from Equitymaster
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  • Jul 24, 2014 - Cairn India: New depreciation policy pulls bottomline

Cairn India: New depreciation policy pulls bottomline
Jul 24, 2014

Cairn India Ltd has announced results for the quarter ended June 2014. The topline registered 10.3% growth year on year (YoY) during the quarter while bottomline declined by 65% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter grew by 10.3% year on year (YoY) on account of higher volumes and realizations.
  • The operating profits for the quarter grew by 4.9% YoY with margins at 68.1% versus 71.6% in 1QFY14.
  • The firm registered a decline of 65.1% YoY in the bottomline (including exceptional items) during the quarter with net profit margins at 24.4% versus 77.0% in 1QFY14. The decline was mainly due to change in method of depreciation from straight line method to Unit of Production method.

Consolidated financial summary
Rs m 1QFY14 1QFY15 Change
Sales 40,629 44,829 10.3%
Expenditure 11,531 14,304 24.0%
Operating profit (EBDITA) 29,098 30,524 4.9%
Operating profit margin (%) 71.6% 68.1%  
Other income 1,251 4,184 234.4%
Interest 105 17 -84.2%
Depreciation 5,193 7,198 38.6%
Forex gain/(loss) 6820 989 -85.5%
Profit before tax 31,871 28,482 -10.6%
Profit before tax margins (%) 78.4% 63.5%  
Tax 599 1,279 113.6%
Effective tax rate (%) 1.9% 4.5%  
Profit after tax  before exceptional items 31,272 27,203 -13.0%
Net profit margins before exceptional items (%) 77.0% 60.7%  
Exceptional items net of tax 0 16,274  
Net profits post exceptional items 31,272 10,929 -65.1%
Net profit margins post exceptional items(%) 77.0% 24.4%  
No. of shares   1,874  
Diluted earnings per share (Rs)   55.5  
P/E ratio (x)   5.8  

What has driven the performance in 1QFY15?
  • The revenues for the year (post profit sharing with the Government and post royalty expenses in Rajasthan block) registered a growth of 10% YoY on the back of higher volumes and realizations. The average daily gross production for the quarter stood at 217869 barrels of oil equivalent per day (boepd), of which Cairn India's working interest accounted for around 63% , with production from Rajasthan, Ravva and Cambay contributing to 84%, 11% and 5% respectively.

  • The operating profit margin for the quarter declined by 3.5% (in rupee terms). During the quarter, the realizations (dollar denominated) for oil and gas grew by 4% YoY and 15% YoY respectively. The higher realizations were offset by increase in Production expenses, staff costs and exploration costs written off. However, Cairn India witnessed a marginal decline in statutory levies and other costs (both as a % of sales).

    Cost breakup
    Rs m 4QFY13 4QFY14 Change
    Production expenses 2,372 3,282 38.4%
    as a % of sales 5.8% 7.3%  
    Employee benefit expenses 143 404 183.2%
    as a % of sales 0.4% 0.9%  
    Statutory levies 7,123 7,292 2.4%
    as a % of sales 17.5% 16.3%  
    Other costs 893 780 -12.7%
    as a % of sales 2.2% 1.7%  
    Exploration costs w/off 1,001 2,546 154.4%
    as a % of sales 2.5% 5.7%  
    Total costs 11,531 14,304 24.0%
    as a % of sales 28.4% 31.9%  

  • The net profit for the year (including exceptional items) declined by 65% YoY. This was because the company has changed the method of accounting for depreciation expenses from 'Straight Line' method to 'Unit of Production' method with, retrospective effect. As such, the company has booked exceptional expenses worth Rs 16 bn, net of tax. The company witnessed a sharp decline in the interest costs and increase in other income during the quarter. However, the same was offset by higher depreciation charges and decline in the forex gains. The effective tax rate for the quarter also increased to 4.5% during the quarter, as compared to 1.9% in 1QFY14.
What to expect?

The management is confident of establishing around 3 billion boe hydrocarbons in place by FY17 and aims to achieve a reserve replacement ratio of 150% over a three year period. The management has given an average annual production growth guidance of 7% - 10% from known discoveries with flat production in FY15. The company has identified significant gas potential in the block and plans are underway to advance commercialization of discovered gas volumes. The management has further stated that the firm's two main projects of enhanced oil recovery and debottlenecking Mangala Processing Terminal are running as per schedule.

The capex for the quarter stood at Rs 25 bn led by development activity in the Rajasthan block. The management anticipates establishing an additional 1.2 bn boe hydrocarbons in-place during FY15/16. The company has received environment clearance for RJ block to increase production to 300kboepd.

The company has been in news for using its surplus cash to give a loan of US$ 1.25 bn to Sesa Sterlite for two years. Of this, USD 0.8 bn has already been disbursed. The loan has been given against parent company guarantee with return at LIBOR +3%. This has raised concerns regarding the usage of cash by the company, leading to a decline in the stock price.

At the current price of Rs 320 the stock of Cairn India is trading at a price to earnings multiple of 5.8 times TTM earnings earnings. We are in the process of revising our estimates for the company and will update our subscribers soon about the target price. Until then, we recommend investors not to Buy the stock at current price levels

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