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Cairn India Equity Research

HomeCompanyCairn India Equity Research

Date of Research – 14 January 2016

Price – Rs. 122.60

ON 11 APRIL 2017, CAIRN INDIA MERGED WITH VEDANTA

About the Company

Cairn India Limited (“Cairn India or the “Company”) was incorporated on 21 August 2006 as a subsidiary of UK-based Cairn Energy PLC and got listed on the BSE and NSE on 9 January 2007. Cairn India is one of the largest independent oil and gas exploration and production companies in India and is engaged in various related businesses including exploring, refining, trading, transporting and marketing of oil and gas.

The Company also deals in minerals and oil and gas related by-products. Cairn India’s producing assets are in Rajasthan, Cambay and Ravva. The Company has a total of 10 blocks/fields in its portfolio. The Company is participant in various oil and gas blocks/fields (which are in the nature of jointly controlled assets), granted by the Government of India through production sharing contracts.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Income from Operations 11,860.65 17,524.15 18,761.70 14,646.20 8,625.57 
Expenses 2,606.24 4,490.99 5,075.98 6,123.57 5,260.71  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 9,254.41 13,033.16 13,685.72 8,522.63 3,364.86  
Depreciation 1,440.30 1,845.92 2,297.36 2,569.47 3,107.15  
Finance Costs 225.80 68.66 41.48 20.34 26.96  
Other income 938.01 1,036.24 1,502.71 1,809.27 2,008.42  
Exceptional items 11,673.80
PBT 8,423.47 12,154.82 12,849.59 5,109.09 (9,434.63) 
Tax 485.73 235.08 417.80 629.49 (2.75) 
Extraordinary items (136.65) – 
PAT (before Minority Interest and share of Associates) 7,937.74 12,056.39 12,431.79 4,479.60 (9,431.88) 
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates – 
Consolidated Profit / (Loss) for the year 7,937.74 12,056.39 12,431.79 4,479.60 (9,431.88) 

Profitability Analysis

Consolidated (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Operating Profit Margin Ratio 78.03 74.37 72.94 58.19 39.01  
Net Profit Margin Ratio 66.92 68.80 66.26 30.59 (109.35) 

*The Company changed its financial year closure from 31st December to 31st March in FY 2009. Figures for FY 2009 are average for 12 month period ended 31st March 2009.

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 1,907.40 1,910.24 1,907.63 1,874.85 1,874.86
Reserves & Surplus 46,384.67 45,789.19 55,530.06 56,995.35 46,917.69
Employee Stock Option Outstanding
Net worth (shareholders funds) 48,292.07 47,699.43 57,437.69 58,870.20 48,792.55
Long term borrowings
Current liabilities 2,603.39 3,433.64 4,404.37 5,074.03 4,775.81
Other long term liabilities and provisions 2,558.11 2,404.06 3,113.14 1,618.25 1,824.39
Deferred Tax Liabilities 464.08 735.59 1,271.83 1,102.83
Total Liabilities 53,453.57 54,001.21 65,690.79 66,834.31 56,495.58

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 38,769.44 28,974.99 30,772.71 29,539.86 16,285.89
Noncurrent Investments
Current assets 11,445.00 19,713.84 22,132.67 19,402.91 29,422.85
Long term advances and other noncurrent assets 3,228.74 5,312.38 12,785.41 17,891.54 10,786.84
Deferred Tax Assets 10.39
Goodwill on consolidation (net)
Total assets 53,453.57 54,001.21 65,690.79 66,834.31 56,495.58

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 19.16 27.32 23.83 14.48 6.90
ROE / RONW 16.44 25.28 21.64 7.61 (19.33)

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Total Income from Operations (Rs. Cr.) 11,860.65 17,524.15 18,761.70 14,646.20 8,625.57 
Growth (%) 15.40 % 47.75 % 7.06 % (21.94 %) (41.11 %) 
PAT (Rs. Cr.) 7,937.74 12,056.39 12,431.79 4,479.60 (9,431.88) 
Growth (%) 25.31 % 51.89 % 3.11 % (63.97 %) (310.55 %) 
Earnings Per Share – Basic (Rs. ) 41.71 63.16 65.08 23.85 (50.31) 
Earning Per Share – Diluted (Rs. ) 41.61 63.06 64.95 23.77 (50.31) 
Price to Earnings 8.05 4.32 5.77 8.87 – 

Dividend History

The Company has maintained an average dividend yield of 2.28 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Cairn India’s average current ratio over the last 5 financial years has been 4.74 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Cairn India’s average long term debt to equity ratio over the last 5 financial years has been 0.01 times which indicates that the Company operates with very low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Since Cairn India operates with very low levels of debt, its average interest coverage ratio over the last 5 financial years has been 201.62 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2016, Cairn India reported a promoter holding of 59.88 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 23.43 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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