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Business News/ Market / Mark-to-market/  Cairn’s oil output leaves investors thirsty
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Cairn’s oil output leaves investors thirsty

Investors are worried about production ramp-up or rather the lack of it

Unless production ramps up to higher levels and more clarity emerges on how it utilizes cash, investors are likely to remain cautious on the stock. Premium
Unless production ramps up to higher levels and more clarity emerges on how it utilizes cash, investors are likely to remain cautious on the stock.

Cairn India Ltd’s shares have underperformed the S&P BSE Oil and Gas index so far in this fiscal year. Its stock has increased by around 6% compared with a 16% increase in the oil and gas index. While most stocks in the space, especially shares of state-run oil companies were outperforming the oil and gas index, the Cairn India stock has lagged behind. The reason is simple—investors are worried about production ramp-up or rather the lack of it.

For the June quarter, production has been in-line with expectations, say analysts. Cairn India’s average daily gross production increased by 3% over the same period last year to 217,869 barrels of oil equivalent per day (boepd). Sequential decline in production is on account of an unplanned outage. Average price realization for the June quarter remained strong at $97 a barrel of oil equivalent compared with $93.3 per barrel of oil equivalent in the same period last year.

As a result, Cairn India’s June quarter consolidated revenue shows 10% year-on-year growth to 4,483 crore. That, however, missed Street estimates marginally. Bloomberg had pegged Cairn India’s revenue at 4,600 crore.

Revenue growth was muted, and to make matters worse costs were higher, putting pressure on the operating performance. Operating profit margin for the June quarter slipped to 68% from 71.6% in the same quarter last year. That was mainly due to considerably higher exploratory costs written off and a sharp increase in employee costs. Sequentially too operating margins were lower. Cairn India’s reported net profit shows a sharp drop of 65% to 1,093 crore mainly on account of change in the depreciation method.

As on 30 June, the company’s cash and equivalents stood at a comfortable 13,561 crore, but its utilization is also a concern for investors. In the absence of any major investment plans, analysts are concerned that this cash could be deployed within the promoter group companies of the Vedanta group. They would prefer that a company’s surplus funds are used for expansion, or to fund acquisitions or returned to shareholders by way of dividends or share buybacks.

Valuations are attractive at present, as the stock trades at six times its estimated earnings for the current fiscal year. But triggers for meaningful upsides are few and far between. Cairn India is looking at a shutdown for some days in the current quarter. “This could impact the daily gross average production rate for Q2FY15," said the company.

In any case, production guidance for this year is weak. Unless production ramps up to higher levels and more clarity emerges on how it utilizes cash, investors are likely to remain cautious on the stock.

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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.
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Published: 23 Jul 2014, 09:42 PM IST
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