UBS:: Cairn India - Raise PT on higher oil price forecasts

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UBS Investment Research
Cairn India Limited
Raise PT on higher oil price forecasts

�� Raise target price to Rs375; maintain Neutral rating
We increase our PT by 5.7% from Rs355 to Rs375 on the back of increase in our
global oil price forecasts by US$6/bbl to US$85/bbl (Brent) for 2011 and beyond.
2010 Oil price trend was mostly in line with our expectations, although global
inventories are modestly lower than we expected. We upgrade our EPS estimates
for FY11, FY12 & FY13 by 11.1%, 9.9% & 8.5%, respectively.

�� Delay in approval for Vedanta group bid
Vedanta’s bid to buy out Cairn Energy plc’s 62% stake in Cairn India is awaiting
Govt approval. Moreover, issues like ONGC’s (30% holder) first right of refusal
on the deal, cess & royalty payments may reduce the value of the company. We
don’t see positive stock sentiment until the matter of Vedanta deal is cleared.

�� Will a new management mean a new PSC- No certainty yet
Cairn is currently paying cess of $7.41/bbl under protest; the company’s stand is
that it should not be paying cess while GoI’s case is that it should pay current cess
at $7.41/bbl. If the new management is required to pay cess at the higher rate (vs
our $2.75/bl) it would reduce our valuation by Rs23/share. Similarly, the new
management may be required to pay royalty which at present is completely borne
by ONGC. At 10 & 20% contribution, our valuation reduces by Rs31& Rs60, resp.

�� Valuation: Raise price target to Rs375; maintain Neutral
Our SoP based price target is Rs375/share. The stock is highly leveraged to crude
prices which we assume at US$85/bbl.


Valuation
We derive our price target of Rs375 from a sum-of-the-parts valuation. Cairn
derives 64% of its value from the Mangala, Bhagyam and Aishwariya (MBA)
fields. We estimate the MBA and other fields in Rajasthan account for about
95% of Cairn’s value. We have valued the MBA fields on a DCF basis.
We have valued Cairn’s other interests in exploration prospects on an EV/boe
multiple basis. We ascribe a 14% risk weighting to these exploration prospects
and apply an EV/boe of US$9.58 to these reserves.
We derive 13% of Cairn’s value from smaller fields in Rajasthan. We value
these fields by applying an EV/boe of US$9.58 and assign a risk weighting of
20% to the fields.