Cairn India Ltd’s revenue growth during the March quarter was helped by strong price realizations, as crude oil prices remained firm during the quarter. Revenue rose by 18% sequentially, while earnings before interest, tax, depreciation and amortization increased by 22%.
Its performance has been in line with the Street’s expectations. Net profit growth is ahead of estimates, but primarily due to a MAT (minimum alternate tax) credit, which lowered its tax outgo.
Cairn India is the only crude oil play in the country, unlike stocks such as Oil and Natural Gas Corp. Ltd and Oil India Ltd, which share the subsidy burden of oil marketing companies. So, higher crude prices are good news for Cairn India as they go straight to its profit.
The company’s price realizations in the March quarter increased to $93.10 (Rs 4,200 today) per barrel, about 25% higher sequentially, and representing a discount of about 12% to the average Brent price. Output from its Mangala fields (in Rajasthan) averaged 5% lower sequentially at 118 kilobarrel per day (kbpd).
The company is looking to exit the current calendar year with a production of 175 kbpd. Cairn India maintains that the Mangala reservoir would be able to support production of 150 kbpd. However, that would require necessary approvals from key stakeholders. A delay in production ramp-up would not augur well for its performance.
“We estimate a hit of about 8% to Cairn India’s FY12E EPS (earnings per share) in the event of a delay in Mangala ramp-up by two quarters,” wrote analysts from Systematix Shares and Stocks Ltd in their post-results note.
This would imply that the firm exits 2011 at an output 6% lower than what was guided. Any adverse decision on the royalty front, too, could pose a risk to earnings and valuation, as per the note.
Meanwhile, analysts are turning bearish on the outlook for crude oil in the second half of the calendar year. It’s a pity that the Cairn India stock did not rally along with crude oil prices due to the Vedanta deal overhang. Falling crude oil prices may dampen investor sentiment, despite the stock not benefiting when oil prices rallied.
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