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Cairn India: A weak quarter - Views on News from Equitymaster

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Cairn India: A weak quarter

Oct 27, 2014

Cairn India Ltd has announced results for the quarter ended September 2014. The topline registered 14.4% decline on a year on year (YoY) basis during the quarter while bottomline declined by 33% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 14.4% year on year (YoY) on account of higher volumes and realizations. In dollar terms, the revenues declined by 12% YoY
  • The operating profits for the quarter declined by 23.7% YoY, with margins at 66.7% versus 74.9% in 2QFY14. In dollar terms, operating profits declined 24% YoY for the quarter.
  • The firm registered a decline of 32.7% YoY in the bottomline (including exceptional items) during the quarter with net profit margins at 57.2% versus 72.8% in 2QFY14. In dollar terms, the decline came in at 31% YoY.
  • Cairn India has appointed Mayank Ashar as the managing director & chief executive officer of the company with effect from November 17, 2014, subject to approval of shareholders and other regulatory approvals.
  • Gross capex for the quarter stood at Rs 21.8 bn, mainly led by development and exploration activity in Rajasthan block.
  • The company declared interim cash dividend of Rs 5 per equity share during the quarter. Also, the company paid a final dividend of Rs 6.5 to shareholders
  • Gross average daily operated production stood at 194,508 barrel of oil equivalent per day (boepd). Including internal consumption of gas, the production came in at 204,128 boepd.

Consolidated financial summary
Rs m 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 46,499 39,821 -14.4% 87,128 84,649 -2.8%
Expenditure 11,687 13,265 13.5% 23,022 27,569 19.8%
Operating profit (EBDITA) 34,812 26,556 -23.7% 64,107 57,080 -11.0%
Operating profit margin (%) 74.9% 66.7%   73.6% 67.4%  
Other income 1,109 3,460 212.0% 2,163 7,644 253.3%
Interest 110 51 -53.6% 215 68 -68.5%
Depreciation 5,465 7,028 28.6% 10,659 14,226 33.5%
Forex gain/(loss) 4,292 2,403 -44.0% 11,112 3,392 -69.5%
Profit before tax 34,637 25,340 -26.8% 66,508 53,822 -19.1%
Profit before tax margins (%) 74.5% 63.6%   76.3% 63.6%  
Tax 787 2,561 225.6% 1,385 3,840 177.2%
Effective tax rate (%) 2.3% 10.1%   2.1% 7.1%  
Profit after tax  before exceptional items 33,851 22,779 -32.7% 65,123 49,982 -23.3%
Net profit margins before exceptional items (%) 72.8% 57.2%   74.7% 59.0%  
Exceptional items net of tax         16274  
Net profits post exceptional items 33,851 22,779   65,123 33,708 -48.2%
Net profit margins post exceptional items(%) 72.8% 57.2%   74.7% 39.8%  
No. of shares         1,875  
Diluted earnings per share (Rs)*         49.6  
P/E ratio* (x)         5.7  
* On a trailing 12 months basis

What has driven performance in 2QFY15?
  • The net revenues for the quarter (post profit sharing with the Government and post royalty expenses in Rajasthan block) declined 14% YoY on the back of lower volumes (down 9%), lower realisations due to decline in the crude prices and higher profit petroleum tranche in Rajasthan. The average price realization for oil stood at US$ 91.3 per barrel, down 4% QoQ.

    The operating profit margin for the quarter declined by 23.7% (in rupee terms). Apart from lower volumes and weaker realizations, the decline was due to higher production costs, increased facility and well maintenance costs because of shutdown in Rajasthan and surge in the exploration costs. The operating costs in Rajasthan block increased to US$ 6.3 per barrel.

    Cost breakup
    Rs m 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Production expenses 2,932 4,251 44.9% 5,304 7,533 42.0%
    as a % of sales 6.3% 10.7%   6.1% 8.9%  
    Employee benefit expenses 271 74 -72.7% 414 478 15.6%
    as a % of sales 0.6% 0.2%   0.5% 0.6%  
    Statutory levies 7,293 6,560 -10.0% 14,416 13,852 -3.9%
    as a % of sales 15.7% 16.5%   16.5% 16.4%  
    Other costs 678 1,039 53.3% 1,375 1,819 32.3%
    as a % of sales 1.5% 2.6%   1.6% 2.1%  
    Exploration costs w/off 513 1,341 161.6% 1,513 3,887 156.8%
    as a % of sales 1.1% 3.4%   1.7% 4.6%  
    Total costs 11,687 13,265 13.5% 23,022 27,569 19.8%
    as a % of sales 25.1% 33.3%   26.4% 32.6%  

  • The net profit for the year declined by 32.7% YoY. Apart from a weak operating performance, high depreciation expense (due to change in the depreciation method and increase in the asset capitalization) led to the decline in the bottomline.
What to expect?

The company has made three new discoveries in the quarter. The management aims to achieve a reserve replacement ratio of 150% and has given an average annual production growth guidance of 7% - 10% while production in FY15 is likely to remain flat. For capex, the company has maintained guidance of US$ 3 bn until FY17, of which 40% is earmarked for FY15.

Recently, the company's loan of US$ 1.25 bn to Sesa Sterlite for two years has raised concerns about the way management is using cash and does not suggest the best as far as interests of minority shareholders are concerned. The stock price has also come down recently due to softening crude prices which will have a direct impact on the earnings of the company. While cost of production is relatively lower for Cairn India, this quarter, the cost of production has gone up for the company while production came down.

Currently, the stock is trading at a trading 12 months price to earnings ratio of 5.7 times. Because of these concerns, we suggest investors to avoid buying the stock despite the correction in stock price.

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