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Cairn India (CAIL.BO): Likely momentum building for Vedanta-Cairn
deal; reiterate Buy
Source of opportunity
According to Economic Times (10 Jan 2011), Prime minister Manmohan
Singh has directed the petroleum ministry to decide within this month if
the $9.6-billion Cairn-Vedanta deal should be approved or rejected. Also,
according to Wall Street Journal, the Oil Secretary S. Sundareshan
confirmed that a decision regarding the deal will be made by January
2011 end or February 2011 beginning.
With some degree of certainty on the deal timeline, momentum is
building once again for the Vedanta-Cairn deal. The deadline for closing
the deal is 15 April 2011.
We believe that Cairn India’s new parent would have to continue to
focus on organic/inorganic reserve accretion by reinvestment of cash
flows in order to get return on their investment in Cairn India. Hence the
risk of using Cairn’s cash in other unrelated business appears low, in our
view.
Catalyst
The key stock performance catalysts include: 1) increase in oil prices
through 2011-12; 2) success in exploration portfolio; 3) updates on train
4 of oil terminal and pipeline to Gujarat coast, expected to be completed
in 2HCY11; and 4) updates on Sri Lanka prospectivity in coming
quarters.
We reiterate Buy on Cairn India with NAV-based 12-m TP of Rs395 (20%
upside), increased from Rs375 earlier , on account of higher earnings
arising from higher oil prices and a weaker USD INR rate. We have used
a normalized Brent price of US$85/bbl from FY14E onwards and Cairn’s
realization at 15% discount. We estimate that Cairn stock is currently
implying Brent price of US$79/bbl from FY12 into perpetuity vs. current
Brent of around US$95/bbl and our long term forecast of US$85/bbl.
Key risks
1) Delay in Rajasthan ramp-up, 2) exploration failure, 3) regulatory risk.
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