>CAIRN: Q1FY13 Result Update

Pipeline debottlenecking to watch out for
Cairn reported a stellar performance inQ1 buoyed by higher crude production volumes, higher net realisation for Rajasthan crude, higher forex gains and lower tax outgo. The company reported PAT of Rs38.3bn which included Rs8.7bn forex gains. But for forex gains PAT would have been Rs29.6bn. Following government approval, the company has been producing 175,000bpd since mid-April averaging at 167,146bpd in Q1. Pipeline constraint is likely to keep the current production level stagnant over the next couple of quarters. Hence production upside can be envisaged only from Q4FY13 during which the company is also expected to commence production from its Aishwariya field.


Rajasthan production at 175,000bpd: Cairn received approval to increase Mangala production to 150,000bpd in early Q1 which led to average production during the quarter to 167,146bpd. Gross production from all assets of Cairn stood at 206,963bpd while net was at 127,226bpd during Q1.


 Rajasthan crude fetches only 7.3% discount: Rajasthan crude fetched only 7.3% discount to Brent during Q1 and netted US$100/bbl benefitting revenues and profitability. Average crude realisation during Q1 was at US$101.0/bbl while average natural gas realisation was at US$4.5/mmbtu.



Significant forex gains add to bottom-line: Opex (incl. pipeline transportation) for Q1 stood at US$2.3/bbl and DDA was lower at US$7.0/bbl owing to higher crude production. The company also reported forex gains of Rs8.7bn on forex deposits and receivables. Tax rate also favored Cairn which remained low at 4.7%. Higher crude volumes, lower opex and DDA, higher forex income and lower tax rate led to 40.4% YoY and 75.0% QoQ jump in bottom-line at Rs38.3bn despite higher cess.
 
Augmenting pipeline capacity would be the near term objective: Devoid of incremental pipeline capacity, Cairn’s crude production is likely to stagnate at 175,000bpd over the next couple of quarters. The company has also guided for delayed commencement of Aishwariya production from end CY12 to Q4FY13 (delayed by a quarter). Instead of adding pumps to raise the pipeline capacity (capex of over US$100mn+), the company is going ahead with a cost effective method of using drag reducing agents which would debottleneck the existing capacity from current 175,000bpd to 300,000bpd eventually. We believe the augmentation of pipeline capacity would be a trigger for the stock going ahead. The company has also indicated capex of over US$2.0bn for FY13E and FY14E of which 60% will be utilised for exploration and
development of Rajasthan assets while the rest would be invested in other exploration programs and matured assets. We remain optimistic on Cairn’s ability to increase production from current 175,000bpd to 300,000bpd over the next 2-3 years given the successful track record in development of Rajasthan field (contingent on government approvals). We thus maintain our ‘Buy’ rating on the stock with a price target of Rs387.

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