Cairn India stock pales despite glowing Q1 net

Anand Kalyanaraman BL Research Bureau | Updated on March 12, 2018 Published on July 28, 2011


Govt condition on cost-recoverability of royalty to dent profits

Cairn India's June 2011 results script was similar to its March quarter one. Production ramp-up (up almost three-fold) in the Rajasthan block coupled with a 55 per cent increase in realisations helped the company grow consolidated profits almost 10 times year-on-year to Rs 2,727 crore. Even on a sequential basis, profits grew around 11 per cent, aided by a buoyant output-price combination. Margins, already healthy, headed further north.

Yet, the stock lost around 3.7 per cent in the last two trading sessions.

The markets seem to have been spooked by indications that Cairn Energy and Vedanta seem set to accept the Government's conditions to let the proposed sale of Cairn India go through. The not-so-pleasant implication of this was made plain by Cairn India, which pointed that the June quarter revenues and profits would decline by Rs 1,292 crore, if royalty became cost-recoverable.

This translates into the June quarter reported profits being shaved off by almost 47 per cent to Rs 1,435 crore. Even if Rs 129 crore pertaining to royalty of previous periods is excluded, profits stand reduced by almost 43 per cent. Fears of a similar sharp impact on the bottom line, going forward, seems to have got the markets worried.

Possibly in a bid to hedge its position from protests of minority shareholders, Cairn India has decided to hold a postal ballot of all shareholders to consider the Government's conditions. However, given the current shareholding pattern of the company (Cairn Energy and Vedanta together control almost 81 per cent), it is an almost foregone conclusion that any resolution mooted by the Cairn Energy-Vedanta combine will go through, irrespective of whether it needs a simple or special majority.

Also, despite its high potential, the company's current output levels of 125,000 bpd (barrels of oil per day) from the Rajasthan fields may not increase substantially, unless ONGC and the Government cooperate – a fact acknowledged by Cairn India.

Hopefully, with ONGC apparently set to have it way, its uninspiring track record of cooperation with Cairn India will improve. Also, the commencement of sharing of profit petroleum with the Government (Rs 188 crore in the June quarter) seems to have been a dampener for the stock.

Published on July 28, 2011
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