Stock Market Result Update on Cairn India for 2QFY2012

 Stock Market Result Update on Cairn India for 2QFY2012 with an Neutral recommendation. 

Cairn Indias (CIL) 2QFY2012 net sales decreased by 1.3% yoy despite a 48.0% yoy increase in crude realization due to royalty payment. The companys adjusted PAT decreased by 85.6% due to one-time royalty adjustment. We maintain our Neutral view on the stock.

Royalty dents CIL’s 2QFY2012 performance: Despite increased crude oil realization by 48.0% yoy to US$102.8/bbl, net sales decreased by 1.3% to `2,652cr due to royalty payment of `770cr. Operating profit decreased by 4.5% yoy to `2,104cr during the quarter. The company provided for previous outstanding royalty on Rajasthan share of `1,355cr. Excluding the exceptional forex gain of `531cr, adjusted net profit declined by 85.6% yoy to `232cr.

Timelines uncertain on production growth beyond FY2012: CIL remained optimistic to reach an exit capacity of 175,000bopd by FY2012. However, management opined that due to constraints in pipeline capacity, further meaningful growth in production could be pushed beyond CY2012.  

Outlook and valuation: We expect production to increase in the coming quarters once CIL receives the required approvals. However, we believe the current stock price discounts this production growth. Nevertheless, there are various exploratory upsides untapped in Barmer Hills and other fields waiting to be developed and commercialized. At current price levels, we remain Neutral on the stock.