Ambit Capital downgrades Cairn India

Ambit Capital downgrades Cairn India
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First Published: Fri, Jul 31 2009. 09 16 AM IST
Updated: Fri, Jul 31 2009. 09 16 AM IST
Cairn India reported better than expected quarterly numbers, driven by lower costs and tax credits.
While revenues grew by 13% q-o-q, net profit increased by 139%, from Rs190 million in Q4FY09 to Rs455 million in Q1FY10. This is despite total gross volumes increasing by just 0.5% q-o-q.
Net profit for the quarter would have been higher at Rs1882 million, if not for an exceptional provisioning of Rs1637 million. This is in respect of amount deducted by the buyers and remitted to GoI pursuant to its directive to recover profit petroleum of earlier years in relation ”ONGC Carry” case.
The provisioning effect was partially offset by 1) lower expenses (-37% q-o-q) 2) deferred tax credit of Rs4.2bn, resulting in a net tax credit of Rs2.1 billion.
We however note that with just ~4% of our base case fair value coming from Ravva and Cambay, we see limited merit in reading too much into these quarterly numbers.
With the revised FDP (increased offtake of 125k bopd from Mangala) having been approved by the GoI, Cairn is targeting start of production from Mangala by August ’09 initially at the rate of 30k bopd.
The evacuation of crude would be by way of trucking till the end of 2009, by which time the pipeline is expected to be commissioned. The management has however indicated that weather and other factors pose schedule risk for the completion of the pipeline.
Our numbers factor in pipeline commissioning by Dec ’09 and hence any delay would negatively impact our estimates, given trucking opex of $10/bbl verses pipeline’s $1.5/bbl.
Pricing
The management has confirmed that the pricing of the Rajasthan crude has been benchmarked to Bonny Light with appropriate adjustments for crude quality.
The pricing/discount formula - to be valid till March 2011- would be based on the difference between the Gross Product Weight (GPW) between the two crude types).
The implied realisation would represent a 10-15% discount to Brent based on the last six months prices, with the light-heavy spread driving this discount. Our numbers incorporate a pricing discount of 15% to Brent.
We maintain our NAV based 12-month target price of Rs245, and note that our TP implies a 5% upside from the current levels.
We therefore, downgrade the stock from Buy to HOLD and wait for attractive price points to re-initiate fresh long position.
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First Published: Fri, Jul 31 2009. 09 16 AM IST
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