BNP Paribas: Upgrade Cairn to BUY; on track; target Rs 347

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Cairn on track, u/g to BUY

• ƒ Upgrade to BUY with revised TP of INR347/sh vs INR331/sh 
• ƒ Board decides material changes to deal will not be approved 
• ƒ Cairn ready to increase production subject to GOI approval 
• ƒ Strong Q3FY11 results, operations on track

Board decision adds confidence 

In our last note “Open offer limits upside”, 

dated 14th January 2011, we had 

recommended investors take profits as we 

felt the potential upside was limited due to 

the deal over-hang. Based on the board’s 

recent decision to protect shareholder 

interest, coupled with a greater potential 

for appreciation as a result of the 

correction in the stock’s price 

(approximately 10% drop since January 

14 versus a 7% drop in the Sensex) we 

now have greater confidence regarding 

value retention and are comfortable 

adding positions at current levels. In 

addition, recent rise in oil prices will likely benefit Cairn, once the deal 

economics are sorted. We upgrade the shares to a Buy; our TP 

increases from INR331/sh to INR347/sh as a result of us rolling over DCF 

valuation to FY12. 

Cairn – Vedanta deal: Minority interests take front seat 

The company stated that the board has decided that any condition set by 

the government in the process of approval of the deal, if found material in 

nature and is detrimental to the shareholders and Cairn India will not be 

accepted. We believe the company has rightly taken a stance against the 

GOI; this might result in further delays but should increase shareholder 

confidence in the company. The company remains confident regarding its 

dealings with the GoI; however, the timing of the same continues to 

remain uncertain. 

Strong 3QFY11 – Flawless execution 

Cairn India reported 3QFY11 numbers, once again underlying the 

company’s execution strength and operations being on track. The 

company reiterated its guidance of reaching 175,000bpd by end of CY11 

and is currently capable of increasing production from Mangala to 

150,000bpd subject to GOI approvals. Operating expense came in lower 

than our estimate, at USD2.7/bbl and the management highlighted the 

potential for lower OPEX in the near-term, however, they maintained 

long-term guidance at USD5/bbl.  

Recent correction makes the shares attractive

Our TP is changes to INR347/sh (from INR331/sh), we value the MBA fields 

at INR297 per share (DCF), Ravva and Cambay at INR14 (DCF), and other 

exploratory and EOR upsides at INR32 and net cash of INR5/sh. From 

current levels, we see a ~11% upside in spite of pricing in possible deal 

outcomes. Risks: Sudden decline in crude prices, longer than expected 

delays in deal approval and execution delays in Bhagyam and Aishwarya.

The Risk Experts 

• Our starting point for this page is a recognition of the 

macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up 

factors.  

• With our Risk Expert page, we identify the key macro risks 

that can impact stock performance.  

• This analysis enhances the fundamental work laid out in 

the rest of this report, giving investors yet another resource 

to use in their decision-making process

3QFY11 operational update 

Cairn reported 3QFY11 EBITDA of INR25.4b, which was slightly higher than 

expectations on lower OPEX costs at USD2.7/bbl, while profits came in higher at 

INR20.1b owing to low tax rate of 9%. EBITDA margins improved at ~82% vs. ~79% in 

2Q, with 8% q-q increase in production from Mangala field at 124,861 barrels of oil per 

day (bpd). Management estimates long-term field production cost at USD5/bbl 

(USD3.5/bbl upstream and USD1.5/bbl at midstream). Mangala crude realization, at 

USD74.8/bbl, implied a 13.5% discount to Brent (higher end of management guidance 

of 10-15%). (Refer exhibit 1& 2) 

Infrastructure ready to handle ramp up in production 

Management maintained guidance of exiting CY11 at 175,000bpd, and is fairly 

confident of ramping up production from Mangala to 150,000bpd (subject to ONGC’s 

and Government of India approval). Cairn has drilled 125 wells in Mangala, of which 84 

are ready for production and 55 are currently producing. 

Project work has started on Train 4 which will increase production handling capacity to 

205,000bpd. Management guided that Bhagyam field is due to commence by 2HCY11, 

while Aishwarya is scheduled for 2HCY12. The approved production from these fields is 

40,000bpd and 10,000bpd as of date. There is upside to earnings and valuation if Cairn 

manages to get approval for Bhagyam to ramp up to 50,000bpd from GoI and ONGC 

(30% JV partner). 

EOR (Enhanced Oil Recovery) Phase 1 has been completed with eight wells drilled and 

start-up injection testing has commenced (December 2010). On Barmer/ Kaameshwari 

fields and other exploration prospects in Rajasthan block, Cairn is yet to submit its 

CY11 capex program to the Management Committee and JV partner, for incremental 

exploration or appraisal drilling, post which approval is expected.