In Q5FY2009 Cairn India Ltd (CIL)’s income from operations dropped by 42.5% year-on-year (y-o-y) to Rs181.8 crore primarily due to a 19.4% (y-o-y) decline in the hydrocarbon production from its Rava field to 47,374 barrels of oil equivalent per day (boepd) and a 61.6% y-o-y fall in its crude oil realisation to $38.4 per barrel during the quarter.
Moreover, a drop of 1.5% in the gas price realisation to $4 per million standard cubic feet (mscf) also resulted in a decline in the income from operations during the quarter.
However, a 7.6% y-o-y increase in the hydrocarbon production from the Cambay field to 12,913boepd partially offset the decline in the income from operations in Q5FY2009.
CIL’s reported profit after tax (PAT) declined by 84% y-o-y to Rs18.7 crore primarily due to the decline in the operating profit and increase in the effective tax rate in Q5FY2009.
The effective income tax rate increased to 66.9% in Q5FY2009 as compared with 39.5% in Q1FY2009 as the company changed its accounting policy to carry forward the exploration write-offs on some of its wells against its earlier policy of accounting for them in the same quarter.
The decline in the company’s reported PAT was partially offset by a 296.2% y-o-y increase in the other income to Rs86.2 crore and a 29.9% y-o-y decline in the depreciation expenses to Rs44.3 crore in Q5FY2009.
The production from the Rajasthan block is expected to commence by June 2009 with the initial dispatch of crude oil slated to take place through trucking till the pipeline is commissioned in Q4CY2009. CIL has reiterated its plateau production guidance from Rajasthan fields at 175,000 barrels per day.
We highlight two major concerns regarding CIL. The first one pertains to the lack of clarity from the company on its crude oil pricing formula with MRPL, Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL). The street is expecting a discount in the range of 8-12% to the Brent crude oil.
The other concern is that it is still not clear whether CIL will have to pay cess since the government has yet to decide on this. On a conservative basis, the street is assuming a cess liability of Rs927 per tonne on CIL’s share of crude oil.
At the current market price, the stock trades at 20.1x its FY2010 earnings and 14.9x its enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) based on the Bloomberg consensus estimate.
Currently, CIL is trading at a 14% premium to Reliance Industries Ltd (RIL) on the price to earnings parameter.
This premium, we believe, is not justified given RIL’s superior earnings visibility (majority of its earnings expected to come from the less volatile natural gas business) and better project execution capabilities.
Although at the current valuations, the stock appears to be fully priced, yet the upside may come from the firming up of the crude oil price in the near-to-medium term.