Cairn India- Acquisition capping upside:: RBS

Visit http://indiaer.blogspot.com/ for complete details �� ��


Cairn India
Acquisition capping upside
The Rajasthan project delivery to date has been ahead of expectations, but the
proposed acquisition of CIL by Vedanta may cause delays in production ramp-up.
We believe it will also hurt valuations due to concerns about the longer-term use
of Cairn's free cash flow. Stock downgraded from Buy to Hold, with Rs340 TP.





2QFY11 results above expectations…
Cairn India (CIL) reported 2QFY11 net profit of Rs15.9bn (up 228% yoy), 21% above our
expectations. Production costs in the Rajasthan block at US$2.5/bbl were well below
guidance (US$5/bbl) and plateau production of 125kbd was achieved during the quarter. We
have raised our FY11 Rajasthan production and EPS estimates by 4% and 25% respectively.

… but we reduce our medium-term volume estimates
In Rajasthan, ONGC (30% stake) pays 100% of royalty (which is not cost recoverable) and is
awaiting satisfactory resolution of this issue. Hence, we now anticipate delays in hiking
Mangala production from 125kbd to 150kbd and in commissioning Aishwariya facilities. We
have cut our FY12/13 Rajasthan production estimates by 1-7% and EPS by 2-5%.

Vedanta open offer at Rs355/share
CIL’s parent, Cairn Energy plc (CEP) has agreed to sell a maximum of 51% of CIL to the
Vedanta group at Rs405/share (Rs50/share non-compete fee). Upon receiving approvals
from the Indian Government (GOI), Vedanta proposes to make an open offer to CIL minority
shareholders at Rs355/share. Despite some negative news flow in last few months, we
expect the deal to be cleared by 4QFY11.

Downgrade to Hold, Rs340 target price
Our DCF-based fair value is Rs326 (from Rs330 earlier), based on a long-term Brent oil price
of US$88/bbl, Rs/USD rate of 45 and discount rate of 10%. Any acquisition by Vedanta
would likely raise concerns about the use of CIL’s free cash flow following such acquisition
due to the former’s conglomerate status. We have factored in these concerns by raising the
discount rate to 11%, which lowers the fair value to Rs313. Taking into account the lower fair
value and the higher open offer price (Rs355), we raise our target price to Rs340 and
downgrade the stock from Buy to Hold.