Maintain ‘neutral’ on Cairn India and assign a target price of R250 (earlier R275). The stock trades at 10.7x FY16e EPS of R22.4 and has a dividend yield of ~5%. We lower the Brent price assumption for FY16e/FY17e from $75-85 per barrel to $60-70 per barrel, resulting in 26% cut in FY16e/17e estimates.
Cairn’s ebitda beat and higher tax impacted net profit. The company’s Q3FY15 sales at R3,500 crore were above estimate led by higher Ravva production at 28,000 boepd and lower profit petroleum at R950 crore. However, PAT was below estimate at R1,350 crore due to higher tax rate at 22%. Lower-than-expected other income was compensated by higher forex gain.
Increased contribution from satellite fields and Aishwariya ramp-up to 30 bpd aided Rajasthan production to reach 180kbpd. While the earlier production guidance is a three-year CAGR of 7-10%, it will be updated in Q4FY15 results.
Rajasthan realisation at $68.3 per barrel implies 10.8% discount to Brent. Management has guided to remain free cash flow positive and maintain absolute dividend. Despite the 55% crude price decline in the last six months and similar earnings impact, management indicated its intention to maintain the absolute dividend (implies ~40% payout versus policy of 20%). In our view, Cairn’s guidance to remain free cash flow positive could entail some capex program cuts.
By Motilal Oswal