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Business News/ Market / Mark-to-market/  Cairn India: the threat of lower crude prices
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Cairn India: the threat of lower crude prices

Cairn India is the only pure crude play in the country and therefore the movement in crude prices has a big bearing on it

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The Cairn India Ltd stock is like a square peg in a round hole. Even as other stocks in the industry have had a phenomenal rally this year thanks to reforms, Cairn India shares have lagged behind and by a good margin at that. The shares have lost 13.8% while the benchmark Sensex has risen by around 20% and the S&P BSE Oil and Gas index gained 13% so far in this fiscal year. What makes this worse is that there is little reason for a reversal in the trend in the near future, especially given the sharp drop in crude prices in recent months. Cairn India is the only pure crude play in the country and, therefore, the movement in crude prices has a big bearing on the company.

In the September quarter, softer international crude oil prices meant that Cairn India’s average price realization declined by 4% over the same period last year to $91.3 per barrel of oil equivalent. It’s also lower compared with the previous quarter. Cairn India felt the effect of lower realization in its consolidated revenue, which declined by 14% on a year-on-year basis to 3,982 crore. The company’s revenue performance was far better in the earlier quarters. For instance, in the June and March quarter, Cairn India’s revenue increased by 10% and 16%, respectively over the year-ago quarter. Lower volume on account of planned maintenance shutdown also adversely affected Cairn India’s September quarter revenue performance. While investors were aware of the planned shutdown, many analysts maintain that production was lower than estimates.

Higher operating expenses and decline in revenue led to 800 basis points drop in operating profit margin compared with the same period last year to 66.7%. One basis point is 0.01%. Net profit thus declined by a third to 2,277 crore.

Coming back to the stock, while the correction implies that valuations are relatively attractive, the outlook is far from encouraging. The production decline is worrisome. “From a peak of 200kbpd in Mar-14, Rajasthan production fell about 20% in 2Q," wrote analysts from Nomura in a note.Production from Cairn India’s Rajasthan block for the September quarter declined by 7% year-on-year to 163,262 barrels of oil equivalent per day. Investors’ confidence has been low after Cairn India extended a $1.25 billion loan facility to a parent entity, added Nomura. And then, crude oil prices are trending lower making it difficult for sentiment to improve for the stock.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 22 Oct 2014, 01:40 PM IST
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