Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Mark-to-market/  Brent crude outlook to keep spirits low for Cairn India
BackBack

Brent crude outlook to keep spirits low for Cairn India

Lower oil prices cast their shadow on average price realization, which, at $35.2 per barrel of oil equivalent, is 48% lower y-o-y and 19% lower, compared with the September quarter

The cess burden for Cairn India is $10 a barrel, putting significant pressure on profits at a time when crude prices are as low as $30 a barrel. Photo: ReutersPremium
The cess burden for Cairn India is $10 a barrel, putting significant pressure on profits at a time when crude prices are as low as $30 a barrel. Photo: Reuters

Nobody expected miracles from Cairn India Ltd’s December quarter.

In that backdrop, Cairn India’s 99% drop in net profit to 8.7 crore is hardly surprising.

Nonetheless, the numbers are below some analysts’ expectations.

For instance, according to Motilal Oswal Securities Ltd, Cairn India’s reported December quarter earnings before interest, taxes, depreciation and amortization (Ebitda) at 740 crore (66% decline year-on-year, 25% decline quarter-on-quarter) was lower than its estimate of 820 crore—primarily due to lower average realizations and higher opex.

Lower oil prices cast their shadow on Cairn’s average price realization, which, at $35.2 per barrel of oil equivalent, is 48% lower year-on-year and 19% lower, when compared with the September quarter.

Not surprisingly, revenue declined 42% to 2,040 crore over last year.

Falling revenue has meant that cess—one of Cairn India’s major cost components—as a percentage of revenue increased substantially. The cess burden is $10 a barrel, putting significant pressure on profits at a time when crude prices are as low as $30 a barrel.

The government of India has supported the industry’s view on rationalizing the cess charges, given the prevailing low oil prices, said the company.

Needless to say, a relief on this front, when it happens, will be positive for the stock, which, in keeping with falling oil prices, has also been on a very slippery slope.

Cairn India’s share price has nearly halved so far this fiscal year. The company’s cash and cash equivalents position is 18,470 crore. Compare that with its current market capitalization of 2,1167 crore. That can mean two things. Either investors aren’t assigning much value to the core business, or they are assigning a big discount to cash on books on concerns of risks to utilization of cash.

Whatever the reason may be, the drop in share price makes the stock look attractive.

Should one succumb to the temptation? Analysts say that if oil prices persist lower for a longer time then it is a threat to the company’s cash position. The fact that the outlook on crude price is bearish at least from a near-term perspective does not help.

Of course, any development on the Cairn-Vedanta merger is another important factor to follow. According to Macquarie Capital Securities India (Pvt.) Ltd, the gap between Cairn’s share price and the Vedanta Ltd share price is now about 60%, and it does not expect the offer to be upgraded to this degree, which could be a difficult situation for the deal.

The Cairn India stock is trading at a much higher premium than the proposed swap ratio, implying that investors expect a more favourable deal.

“We believe that the existing offer may not be palatable, especially for government-owned insurance firms such as LIC," pointed out Macquarie in its results update.

For investors, events on this front are worth keeping tabs on.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 24 Jan 2016, 11:46 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App