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Cairn India Profit Misses Estimates After Royalty Payments

Cairn India Ltd., the energy explorer being acquired by Vedanta Resources Plc, posted a lower second-quarter profit than analysts expected after accounting for royalty payments for the first time.

Net income, including that of units, fell 52 percent to 7.63 billion rupees ($154 million), or 4 rupees a share, in the three months ended Sept. 30, the explorer based in Gurgaon near New Delhi said yesterday. The median estimate of 23 analysts surveyed by Bloomberg was a profit of 8.5 billion rupees. Sales declined 1.5 percent to 26.5 billion rupees.

The government approved Vedanta’s $8.7 billion acquisition of Cairn India on condition that the company pay its share of royalty from the country’s largest onshore field. Accounting for the payments made on its behalf by partner Oil & Natural Gas Corp. since the block in Rajasthan state started production in August 2009 reduced revenue and profit, explorer said.

The royalty “will continue to be a burden,” said Deepak Darisi, a Mumbai-based analyst with LKP Shares & Securities Ltd. “From the next quarter on, there will be no pending payments and the burden would be much lower.”

Cairn India fell as much as 3.7 percent and traded 2.3 percent lower at 286.75 rupees at 10:26 a.m. in Mumbai. The stock has fallen 14 percent this year, compared with a 17 percent drop in the benchmark Sensitive Index.

Royalty deductions will be at about 15 percent from future crude sales from Rajasthan, R. Ranganath, head of finance at Cairn India, said on a conference call with analysts yesterday.

Vedanta’s Stake

Vedanta, a metals and mining company based in London with no experience in oil and gas, received approval for the takeover from India’s cabinet on June 30 on condition royalty is included in the cost of field development, which can be recovered from sales. ONGC approved the acquisition last month after the condition was accepted.

Vedanta and its units own 28.5 percent in Cairn India, while Edinburgh-based Cairn Energy Plc holds 52 percent, Cairn Energy said in a July 12 statement. Vedanta will buy an additional 30 percent in the explorer from Cairn Energy. The deal was announced in August last year.

With the royalty being included in the cost of development, Cairn India’s share of revenue from the field may decline to about 60 percent from the current 70 percent, Ranganath said.

Crude output at the Mangala field in Rajasthan rose 8 percent to 125,251 barrels a day, with Cairn India’s share at 87,676 barrels, according to yesterday’s statement. Production may rise to 175,000 barrels a day by March 31, after the adjoining Bhagyam field starts, it said.

The Rajasthan block has three fields that may produce a combined 240,000 barrels a day, or about 30 percent of India’s current crude output, according to the company’s annual report for the year ended March 31.

Net oil output, including other fields, rose 5.2 percent to 99,220 barrels of oil equivalent a day, Cairn India said.

Cairn India sells oil at market-linked rates, benchmarked to Brent crude oil prices. The company sold oil at $102.80 a barrel compared with $69.50 a year earlier.

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