Why cairn india has relatively low valuation?

[Snip3r]

cairn india income statement looks fantastic interms of margins, sales growth, roe etc. Decent dividend payout. No debt in balance sheet. Few billions in cash reserves. Still its trading just above its book value. Why is it so? Thanks

 

[Einstein]

Cain India ltd(vedanta group), price to book is 1.31. is you think this is bad then think again, reliance have P/BV of 1.45 and ONGC have 2.01.

I'll give cain india a buy, but need to learn more about the effects of increasing/decresing prices of oil and rupee on it.

 

[jamit_05]

There is something in it we don't understand. NPM is 70%, could someone explain this.

My guess.

Cairn is an exploration company, and there is very little cost involved in finding and selling crude/gas that they discover, hence high margins. There real cost comes in laying down exploration infrastructure, which would come under the heading of "Fixed Assets".

So basically, as long as their investments in exploration bear fruits, the EPS will be good. But, we know that there will be failures too.

 

[Einstein]

Net profit margin (cons.) 2013 2012 2011 2010 2009 2008 2007
68.80 66.93 61.91 67.10 58.65 -2.48 -48.17


Net profit margin(adj.) 2013 2012 2011 2010 2009 2008 2007
64.39 62.39 61.37 51.20 40.08 -2.59 -44.84

add: it is high mainly because you don't need to invest year after year to keep the production in line, its one time investment in oil wells......

Net profit margins are just the tip of the ice berg, companies profit might be increasing but its book value is not. that is the main cause why the market has ignore this company, and its slight undervalued now, its fair value is 400-460Rs per share, if one is sure that the company is hedged against the currency fluctuations then he can invest into it.


add:

airn India has announced a proposal for a buyback from the open
market at a price not exceeding | 335/share, with an indicative maximum
shares of 17.1 crore and the quantum of the buyback not exceeding
| 5725 crore. The buyback process will start in January 2014, post the
approval of shareholders. The limits of the proposed buyback imply a
reduction in the equity capital by 8.9%. Cairn Plc, which holds a 10%
stake in Cairn India, can participate in the buyback. Although the buyback
price is merely at 4% premium to the CMP, the buyback addresses
concerns over cash utilisation and also provides support to the stock
price. With a cash balance of $3.2 billion, yearly cash flow from operation
at ~$2 billion and yearly capex plan of $3 billion for the next three years,
the buyback programme is a good move.

 

[Snip3r]

thanks Einstein. but what i am trying to understand is why different industries have different valuation. for example hcl (also other it stocks) is trading at nearly 9x its book value and it would take 10 years for bv to reach there if i take cagr as 25% (last 3 years profit growth) but cairn india will reach its book value in just 2 years even if you take cagr as 15%. still it stocks are given high valuation. why so?

 

[Einstein]

well.. okay.

Firstly, your defination for valuation is not clear, we are talking here about price to book value ratio right? if you use this ratio, you have to compare oil sector company with oil sector company, WHY?

because it depends on the business how it will utilize its resourse or assets, computer software company don't need much assets, hence they have high price to book ratio, whereas textiles industries need machines to continue production hence their price to book ratio is low, (vardhman textile have 0.80 something, below 1. which means it is in discount to its working capital, cigar butt).

conclusion: you cannot tell if a company is cheap or expensive looking at price to book or enterprice value to book value, but it will give a slight hint how company is producing cash. i.e earnings power.

 

[Snip3r]

yes by valuation i meant market cap/total asset or p/b ratio. and yes i am comparing across sectors to understand how market evaluates them. if i go by what you say why mining companies like nmdc is trading just below 2 pb ratio though there is no huge asset requirement (i am just saying this based on gross block / net block correct me if i am wrong) and balance sheet and income statements as strong as cairn?

 

[Einstein]

well maybe I was not able to express it properly. to keep this short and clean, just remember low p/b could mean stock COULD be undervalued (conditions apply*), but it could also mean the something bad is going on with the company.

for now compare p/b on same sector companies like cairn india with petronet or GAIL.

for those who are new to accounting and valuations, I would recommend to use ratios and valuations to determine if the company is good or not, just leave the price for sometime.

 

[Snip3r]

well maybe I was not able to express it properly. to keep this short and clean, just remember low p/b could mean stock COULD be undervalued (conditions apply*), but it could also mean the something bad is going on with the company.

for now compare p/b on same sector companies like cairn india with petronet or GAIL.

thanks. once i feel balance sheet, income stat, casflow are sound yet stock is trading at a low price (this is my perception. price could be appropriate) how do i proceed further with the analysis?

for those who are new to accounting and valuations, I would recommend to use ratios and valuations to determine if the company is good or not, just leave the price for sometime.

what ratios are those? i am currently using roe, debt/equity, sales growth %, opm, interest coverage, current ratio, dividend payout, pe, pb. am i missing any other significant ratios?

 

[Einstein]

https://www.youtube.com/watch?v=VOn03QDHgTU