BackWill investors worry over Cairn India’s loss?
The results were marred by an one-time item worth Rs505 crore relating to an impairment loss of Cairn India's Sri Lanka asset
Premium
At first glance, Cairn India Ltd’s March quarter results are far worse than analyst expectations. The company reported a consolidated loss of ₹ 241 crore, compared with consensus estimate of a profit of ₹ 656 crore.
The results were marred by an one-time item worth ₹ 505 crore relating to an impairment loss of Cairn India’s Sri Lanka asset. Adjusted for this, the company’s profit works out to ₹ 261 crore, or a drop of about 90% from year-ago levels. Even a net profit of ₹ 656 crore represents a fall of around 80% from the year ago March quarter’s profit of ₹ 3,035 crore. In other words, reported numbers aren’t drastically different from the Street’s expectations.
Of course, the sharp drop in profit is owing to the plunge in crude oil prices. Even though all of this was already known, investors, it appears, were getting jittery ahead of the results announcement. The company’s shares have fallen by over 10% in the past five trading sessions. The fact that Cairn India’s adjusted profit isn’t way off Street estimates may come as a relief.
Thanks to the drop in crude oil prices, the company’s average oil price realization almost halved year-on-year to $48.6 a barrel, which is pretty much the number analysts were working with. Accordingly, Cairn India’s March quarter revenue declined by 47% over the same period last year to ₹ 2677 crore—this is slightly ahead of the Street estimates. Apart from lower realizations, lower volume too affected the company’s performance.
That along with an increase in operating costs meant that operating profit declined nearly four-fifth (or 80%) compared with same period last year. Besides, the amount of exploration costs written off last quarter increased sharply year-on-year weighing on profit; although this was offset by a sharp drop in depreciation and amortization charges.
At the current market price, the stock trades at an undemanding nine times its estimated earnings for this fiscal year. But given where crude prices are, investors are unlikely get excited with the seemingly low valuations. Besides, the outlook on production is weak too. As things stand, the company can be expected to maintain Rajasthan production at 2014-15 levels at best. Average daily gross operated production for the fiscal year 2014-15 from Cairn India’s Rajasthan block fell 4% compared with 2013-14 to 175,144 barrels of oil equivalent per day.
The silver lining for investors is that Cairn India’s shares already seem to capture most of the worries.
The writer doesn’t own shares in the above-mentioned companies.
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!
