Cairn pumps up dull production guidance - Livemint

Cairn India has projected a compound annual growth in output of 7-10% between 2013-14 to 2016-17 from discoveries in Rajasthan, despite flat production in the first year.

Cairn India Ltd has performed well on many counts in the March quarter. Consolidated revenue increased by about 16% over the same period last year to Rs.5,049 crore. The growth can be attributed to increase in production and a weak local currency.

The company's gross average daily production increased by 11% from the year-ago period to 224,429 barrels of oil equivalent per day (boepd). Average price realization in dollars declined by 5% to $94.4 per barrel of oil equivalent.

Of course, a weak local currency will have positively affected realizations in rupee terms.

Net profit increased by 18% to Rs.3,035 crore. Net profit growth was adversely affected on account of higher tax outgo, negating the benefits of higher other income and decline in finance costs. Cairn India's financial results for the last quarter are still slightly better than Street estimates. Additionally, the company achieved its guidance of 2013-14 with an output of 200,000 boepd from its Rajasthan fields, which augurs well.

Now, investors would have to watch out whether production keeps pace with its targets in the current fiscal year. But the company has kept its sights low, which could disappoint shareholders. Cairn India is looking at flat gross average production from Rajasthan in 2014-15, which analysts say is on the weaker side. However, the company is expecting the subsequent two years to be much better, it appears. It has projected a compounded annual growth in output of 7-10% between 2013-14 and 2016-17 from discoveries in Rajasthan, despite flat production in the first year. Signs that output is indeed recovering in subsequent years should be a positive signal to watch out for.

At present, the Cairn India stock trades at about six times its estimated earnings for 2014-15. Sure, valuations appear attractive and the company's strong financials and cash position bodes well. At the end of 2013-14, its cash and cash equivalents stood at about Rs.13,707 crore. In comparison, its latest market capitalization stands at Rs.67,321 crore. However, its share seems to be capturing these positives to a large extent. Since the beginning of 2014, the stock has increased by about 9% so far.

Expecting further upsides in the near term from these levels may be overly optimistic. For one, the production outlook is not very exciting. Second, the outlook on international crude oil prices is weak, as demand conditions are not strong. If crude oil prices remain soft, then Cairn India's realizations in dollar terms will also be adversely affected to that extent.

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