Cairn -Excellent results but other issues more material.:: Kotak Sec

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Cairn India (CAIR)
Energy
Excellent results but other issues more material. Cairn reported 2QFY11 net income
at `15.9 bn (+238% qoq), 23% ahead of our `12.9 bn estimate. However, we would
advise investors to focus on several macro developments, which may pose risks to
valuations and the ongoing Cairn-VED deal. These include—(1) reported ban on further
exploration in Cairn’s key Rajasthan block, (2) uncertainty on the royalty issue and (3)
ONGC’s purported pre-emptive rights. We retain our RS rating on the stock as
developments on (1) the ongoing Cairn-VED deal and (2) exploration ban, if any, will
influence valuations and stock price.


Ramp-up of oil production from Rajasthan boosts 2QFY11 results
Cairn reported 2QFY11 net revenues at `26.9 bn (+220% qoq) and EBITDA at `21.5 bn (+255%
qoq) higher than our estimate of `23.3 bn and `20.9 bn. The positive beat at the revenue level
reflects higher entitlement interest (74%) of Rajasthan’s production (recovery of exploration costs
incurred on behalf of partner ONGC) versus participating interest of 70% and at the net income
level it was due to significantly lower taxation of `1.5 bn versus our estimated `4.3 bn. The qoq
improvement in earnings reflects (1) higher oil production at 81,241 b/d from its key Rajasthan
block versus 31,107 b/d in 1QFY11 and (2) weaker rupee, which offset lower crude price
realization at US$69.5/bbl versus US$72/bbl in 1QFY11. 2QFY11 gas realization was US$4.5/mcf
versus US$4.6/mcf in 1QFY11 and US$3.9/mcf in 2QFY10.
Too much to lose, not much to gain
We see significant downside risk to current valuations from several issues, which have arisen post
the announcement of the Cairn-Vedanta deal. The risks stem from (1) potential ban on further
exploration in Rajasthan, which could wipe out 250 mn boe of risked prospective resources from
Cairn’s overall reserves and resources figure, (2) imposition of royalty, which has a negative impact
of `58/share on Cairn’s fair valuation, (3) ONGC exercising its pre-emptive rights delaying the open
offer significantly and (4) Vedanta pulling out of the deal in light of slew of vexatious issues
resulting in the stock trading closer to a lower price compared to the open-offer price of `355.

Earnings revision for higher crude price and stronger rupee
We have revised our FY2011-13E EPS to `23 (+10.7%), `41 (+11.5%) and `47 (+6.9%) to reflect
(1) higher crude oil price assumption (+ve impact), (2) stronger rupee (-ve impact) and (3) other
minor changes. We have revised our crude price (Dated Brent) assumption for FY2011-13E to
US$79/bbl, US$81/bbl and US$85/bbl versus US$75/bbl, US$75/bbl and US$80/bbl previously. We
now model exchange rate for FY2011E, FY2012E and FY2013E at `45.5/US$, `44.5/US$ and
`44.5/US$ versus `46/US$, `46/US$ and `46/US$ earlier.