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Cairn India | Will The Out-Performance Continue?

  • Analysts have revised the EPS for Cairn India by 10% to Rs40 for FY12 and by 24% to Rs46 for FY13.Cairn India has outperformed the market in the past three months; the stock has gained 25%, while BSE Oil & Gas index has fallen 10%. Will this outperformance continue?Unlike other oil marketing companies which are reeling under selling pressure due to rupee depreciation, high crude prices and ballooning under-recoveries, Cairn India is set to benefit from all sides.Firstly, the rupee has depreciated over 16% since the beginning of the financial year and is hovering around 53 levels. The rupee is expected to remain weak due to burgeoning fiscal and current account deficit and weak global demand.

  • Since Cairn India’s realizations are in dollar terms, weakness in the rupee will boost the earnings. Earnings per share are expected to go up by 3% for every one rupee depreciated against the dollar, said Yogesh Patil, oil & gas analyst from KR Choksey Securities. Analysts have revised the EPS for Cairn India by 10% to Rs40 for FY12 and by 24% to Rs46 for FY13.
  • Brent crude has surged 17% since the October lows and is expected to remain at elevated levels, between $105-115 per barrel due to geo-political concerns in Iran and Nigeria, said analysts. Recently, Iran threatened to halt oil shipments through the Strait of Hormuz (through which a third of the global sea-borne oil exports pass) in retaliations to sanctions by the west against Iran’s nuclear program. Oil production may also stall in Nigeria which is Africa’s largest crude producer as workers protest against government’s move of ending fuel subsidies.

  • CLSA in a report said: With rupee depreciation, Cairn India is pricing in around $75/bbl Brent crude on its valuations. Since Cairn India’s crude oil is benchmarked at 10-15% discount to Brent crude, it will benefit further from higher oil prices. This may also help the company withstand any correction in crude prices.Also with the completion of the Cairn Vedanta deal, the company is awaiting government’s approval to ramp production from MBA (Mangala, Bhagyam and Aishwarya) fields to 175 kbpd from 125 kbpd. Although achieving the production target is contingent on government’s approval, it will be significantly positive for Cairn India. It will help the company achieve its peak production targets; IFCI Financial Services is expecting oil production volume to grow at 36% over FY11-FY13.

  • Moreover, it has also drilled two wells in Sri-Lanka and has started operating on third well in the Mannar Basin in Sri-Lanka. The company will finish the drilling program by March 2012 and will disclose the gas reserve base thereafter. Kotak Securities in a report said, “We remain bullish on Sri Lanka block as it is a frontier basis and Cairn India has the best technology to deploy it.”The only overhang on stock is the royalty payment of Rs1,700 crore to ONGC, which may weigh on earnings of FY12, said analysts.

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