Cairn India -OW: Robust performance from Rajasthan block:: HSBC

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Cairn India Limited (CAIR IN)
OW: Robust performance from Rajasthan block
 Operational parameters in the Rajasthan project are turning
out to be moderately better than previous guidance
 Stock may continue to remain sideways in short term due to
uncertainty surrounding proposed purchase of controlling
stake in the company by Vedanta Group
 We rate the stock OW with a target price of INR360






Operational parameters of Rajasthan block moderately better than expected. Block is
already producing at 125kbpd. The facilities were installed with a nameplate capacity of 130
kbpd but are now capable of delivering 150kbpd from first three production trains. However,
Cairn will need further approval to produce higher quantity. With 75 kbpd capacity 4th train
likely to be commissioned in CY11, the production capacity could reach higher than 225kbpd.
We expect Cairn to achieve plateau production of 240kbpd+ by FY15.
Cairn reported Q2FY11 net profit of INR15.9bn (+238%yoy and 463%qoq), ahead of our
estimates and consensus on the back of lower opex (USD2/bbl for field and USD0.5/bbl for
pipeline) and benefit of MAT credit entitlement. However, company maintained its guidance
for Rajasthan opex at USD3.5/bbl and pipeline opex at USD1.5/bbl. Rajasthan crude’s net
realisation was USD68.7/bbl which implies a 12% discount to Bonny Light. The crude sales
agreement will be up for renegotiation in March ‘11.
Uncertainty related to Vedanta’s offer to buy stakes creating an overhang. Cairn
Energy Plc (CNE LN), the holding company of Cairn India has entered into agreement to
sell a controlling stake in Cairn India to Vedanta Group. Vedanta Group has in turn
announced open offer price of INR355/share. However, Vedanta Group has not been able
to proceed with the transaction due to pending approvals from Government of India. We
expect the uncertainty to continue for some more time as the administrative ministry is
likely to take its time in deciding on the approvals. In the meantime, company has recently
been refused permission to carry out further exploration in the Rajasthan block.
Valuation and risks. We have valued Cairn on DCF for production from known reserves
and a risk-weighted multiple for reserves upsides. We rate the stock OW with a target of
INR360. Our fair value estimate would increase by INR48/share if Cairn were exempt from
oil field cess. Higher peak production of 400kbpd would increase our fair value estimate by
INR27. Risks include non-renewal of PSC, slower production ramp-up, no reserves
upgrades and a lower oil price.