20120323
It is the largest private sector oil production and exploration company in India. RIL, Videocon Ind and Varun Ind are others. It is a giant business.
Pros
- It began oil production in Rajasthan in 2010 and has produced oil at a plateau rate of 125kbd through 2011, from Mangala (the largest find). Rajasthan is the largest contributor to profits as of now. Entire 2011 was wasted with company waiting for govt. approval on acquisition by Vedanta and approval to increase prodcution. On Jan 18, 2012 this year, the company got approval to produce more. On Jan 19, the company began production from Bhagyam (2nd largest find). 3rd largest Aishwarya is going to start production within 2012. The company targets production of 240kbd from Rajasthan (30% of India’s production, not consumption)
- At 125kbd ttm production the company nets more than 8000 cr and trades at PE (CMP/TTM EPS) = 8.21. Net profit should double if 240kbd target is achieved. Bhagyam is expected to touch 40kbd production, while the rest coming from 23 remaining finds within Rajasthan
- Estimated recoverable reserves are 1.6b barrels in Rajasthan, without using enhanced oil recovery techniques. My back of enevelop estimates of this region at 20% annual increased production is 10y life at least for this field
- Company was alloted 3 blocks by Sri Lanka and it has already struck oil in 2
- Peter Lynch’s value investing principals: Primary in sector, it’s got a niche, it’s got a monopoly (nobody can touch it’s oil even if net profit margin is above 60%), people have to keep buying oil
- It’s debt has reduced between FY10 and FY11
Cons
- Pranabda has nearly doubled the cess on domestically produced oil from 2500 to 4500 per tonne. Any high margin business is vulnerable to such extortionsit policy revisions by the tax-man.
- It paid a one-off royalty to ONGC (a road-bloack to the Vedanta acquisition) in 2QFY12, I am afraid such arm-twisting can happen again
- The CEO himself is speculating in insider transactions even after production approval from the government. In fact he sold low and bought high! I am unable to hazard an intelligent guess on this kind of behaviour.
Trivia
- It has Rs 25b sitting on its balancesheet as good will for 5 years now, due to which TTM PAT by tangible assets seems to be above 40%. Illusion of great quality of business.
Disclosures
I have allocated 13% of my current portfolio to Cairn India
investingkitten 