Wednesday, May 13, 2015

Cairn India Stock Analysis

Cairn India
Share price of Cairn India has been relentlessly falling since past 10 months and made fresh 52 week low on 12th May 2015. The stock is down more than 48% from it's 52 week high and is trading at very attractive valuation (The stock trading at roughly 37000 crores mkt cap and the company as 17000 crores of cash as on 31st March 2015). Clearly irrational exuberance is playing here on downside and investors are dumping shares on fear and panic. But a closer look at the overall health of the company and it's valuation standing vis-a-vis global peers presents a compelling opportunity for medium to long term investors. Before comparing it's valuation against a large U.S based shale oil producer, some of the key points that go in favor for investing in the company at current price of Rs.198.

#1. Cairn India is India's largest private oil & gas producer with very strong balance sheet having around Rs.17000 crores of cash.

#2. At 198 bucks the stock is trading at 0.65 times Fy-16 Book Value. Excluding cash the entire company is available at 20000 crores market value which is roughly 1.08 times & 1.37 times FY-14 & FY-15 revenue respectively.

#3. Tax demand of 20,000 crores plus by IT department from Cairn India is highly exaggerated and I believe it might not have to pay more than 5000 crores (if at all it has to pay capital gain tax). Taking that into consideration, Cairn India is still trading at Enterprise Valuation of 25k crores (37k - 17k + 5k).

#4. India crude oil price has gone up 30% from bottom in past couple of months and is expected to rise further due to depreciation in INR vs USD and strength in global crude oil prices. Cairn Inda Q4 FY-15 oil price realization was roughly Rs.3000 while the crude oil price in India is already hovering around Rs.3800 per barrel as on 12th May 2015.

#5. EOG Resources, the largest U.S based shale oil & gas producer, which is expected to be impacted more severely than Cairn India due to collapse in crude oil prices, is trading at far higher valuation than Cairn India. Below is the valuation comparison among them on key parameters. 

TTM Data (1st April 2014 to 31st March 2015)

EOG Resources (data in $ except valuation): 

Total revenue: $16.27 billion
EBIDTA: $ 7.47 billion (EOG resources reported operating loss in Jan to Mar qtr 2015)
Net Profit = $2.08 billion
Net Debt =  $4 billion (approx.)
Mkt Price (As on 13th May 2015) = $93 (EOG:US)
Mkt Value = $50 billion, EV = $54 billion
EV/Sales = 3.32, EV/EBIDTA = 7.23, PE = 24, PBV (FY-16) = 2.8

Cairn India ( data in INR except valuation):

Total revenue: 14,646 crores
EBIDTA: 8520 crores
Net Profit = 4479 crores (Cairn India reported net loss in Jan-Mar qtr due to Sri Lankan asset writeoff)
Net cash =  17000 crores (approx.)
Mkt Price (As on 13th May 2015) = 198
Mkt Value = 37000 crores, EV = 20000 crores
EV/Sales = 1.37, EV/EBIDTA = 2.35, PE = 8.26, PBV (FY-16) = 0.65

Cairn India is trading at 1/3rd the valuation of EOG resources in-spite of being a net cash company and in my view is trading very cheap on both absolute and relative basis. Hence investors with 1-2 years time horizon can start accumulating the stock for at least 50% appreciation from current levels.

Cairn Inda vs EOG Resources


  1. How low will the price go and how long will it stay low? That is the million dollar question.
    Disclosure: I own some shares of Cairn, bought @ Rs 234. Will add if it go below Rs 175

  2. You are absolutely right Sam, no body knows how low the price of a share can go and vice versa. The episodes of massive undervaluation and overvaluation keep happening in the market. take for instance Jubiliant Foodworks, it's valued more than 100 times FY-15 earnings and guess what it's consolidated earnings went down in FY-15 compared to FY-14. People call them growth companies and justify high PEs. Similiar was the case for Educomp which went burst. Same thing happens on the reverse side as well. Stocks like cairn India is far below it's fair valuation and people will have reasons to justify this as well. Who cares, as far as me and my clients are concerned, these are wonderful opportunities. Good Luck.

  3. Can you provide the source you got this information from?

  4. The talk of all the merger with Vedanta is not going to happen at low valuation of cairn india as 25000 crores is the cash and loan given to vedanta. If at all merger happens it cannot be less than the market value of around 55000 crores for Cairn India in which case existing shareholder will get 70% more value than the current level of 175 bucks.

  5. Update: As per FY-15 annual report, total loans and advances for cairn india including MAT credit entitlement is little over 16000 crores while cash and back balance at 17000 crores. Together liquid assets of 33000 crores while the market value as on 9th June was 32300 crores. The entire company is available absolutely free. Amazing. Keep buying the shares. Merger or no merger there si nothing to loose in this investment.

  6. The battering is more panic driven, the speculators are making big out of it.


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