Cairn India's December-quarter operating performance was satisfactory on count of production volume, price realization and adjusted EBITDA margin.
After adjusting for higher exploration costs, core EBITDA margin came in-line with our estimate of 60%. The disappointment came on the net profit which came at INR 13.5 billion versus our estimate of Rs 15.8 billion. This was owing to higher taxes and depreciation charges. We estimate about Rs 1.4 billion of additional depreciation charge in this quarter was related to prior two quarters. This was primarily based on new accounting rules and due to new asset capitalization. We are not perturbed by the higher taxes as cash taxes continue to remain in-line with our estimates. We do not see any need to change our forecasts, moat rating and fair value after the results.
Our fair value estimate remains Rs 380 per share. Cairn is a direct play on crude oil price and therefore, stock price has fallen with the sharp fall in crude prices. Our poor stewardship rating also reflects the impact of poor capital allocation on the sentiments around stock price. However, we find Cairn’s share price to be undervalued as current price is discounting long term crude prices of $55 much below our mid-cycle average crude price of about $70-75 per barrel over 2015-19 period and we're convinced the sell-off in Cairn's shares is overdone as fall in prices is identical to the other mid-size offshore oil producers whereas, Cairn is primarily a much lower cost onshore producer. Cairn's capital outlay plans are on track, and we expect volume growth to pick up mainly towards the second half of fiscal 2016 as company's drilling and well sustenance program start to yield results.
Cairn's long reserves and resource life are key differentiators, and support future growth. Cairn's narrow economic moat is underpinned by the onshore Rajasthan block, which is its dominant revenue source, with rockbottom operating costs of about $4 per barrel and USD 6 per barrel after including infill drilling process costs. Cairn's high fair value uncertainty rating reflects its crude exposure--a globally traded commodity.
