Cairn India – Buy on Dips

How it performed past quarter:

Cairn India’s (CIL) top line at Rs. 2,29.8 Cr, was down 28.2% Y-o-Y (on lower crude prices and production) and up 12.1% Q-o-Q (on higher crude prices) in Q2FY10.

The company’s net hydrocarbon production (includes Rajasthan production, revenues on which were not booked), at 18,638 boepd, increased 8.9% Y-o-Y and 17.1% Q-o-Q.

Crude realisation of USD 69.1/bbl was up 14.8% Q-o-Q, down 40.6% Y-o-Y, and gas realisation was lower at USD 3.9/mmscf.

Higher total expenses (production and employee) resulted in an EBITDA of Rs. 1,33.3Cr. (down 41.5% Y-o-Y and up 0.9% Q-o-Q).

CIL’s results benefited from several exceptional items like foreign exchange fluctuation gain of Rs. 66.18 Cr. (included in other income), reversal of deferred tax liability of Rs. 264.79 Cr.(considering field like as stipulated in PSC against useful economic life), and gain of Rs.163.71 Cr. on reversal of provision in the ONGC carry case (group has won its appeal in Malaysian Court). Hence, CIL’s PAT, at Rs. 469.5 Cr, increased 60.1% Y-o-Y and was almost 10x Q-o-Q.

Outlook

Crude production at the Mangala field commenced on August 20, 2009, In line with its guidance during the 2006 IPO.. Train 1 was commissioned and production has begun. First cargo of crude was delivered to MRPL on October 9, 2009. Train 2 (50 kbpd capacity) completion will be delayed from end CY09 to early CY10 and train 3 (50 kbpd capacity) by H1CY10. With this, Mangala plateau production of 125,000 bpd is targeted by H1CY10. GoI has agreed for CIL to be able to sell to private refiners. Further, management also indicated little impediment to exports. Aishwarya FDP has yet to be approved. CIL estimates the implied price realisation is ~10-15% discount to brent (based on six month ending Sept 2009 average prices).

In addition to the ramp-up of Rajasthan production, the company has 25 discoveries, development of which could positively impact production.

One may look at buying this scrip on dips and hold on as long as you can, for maximising your profit.

By and large the movement will be decided by the oil prices, which is unlikely to come down any time soon.