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Cairn India ---------------------------------------------------- Reinstating Coverage with NEUTRAL
New report: Much already in the price
● We resume coverage of CAIL with a NEUTRAL rating and a target
price of Rs322 (Rs306 previously), which is based on CS’ longterm
crude oil forecast of US$80/bbl.
● We see a short-term trade in CAIL. If the CNE-VED deal is
approved, the stock could trade closer to the open offer price of
Rs355; if the deal falls through, tailwinds of crude at US$100/bbl
(i.e., our NAV estimate would be Rs394) could lead to a catch-up.
● If the deal has to happen, necessary government approvals must
come in the next few weeks. We believe CAIL will unlikely accept
the government’s demand to pay royalties (even if cost
recoverable) just to see the deal through.
● The US$100/bbl crude price may not sustain. Resolution of the
Egypt situation could bring global spare capacity and inventory
levels back into focus. We also see little room for operational
surprises – CAIL has to now work to deliver on the upside it talked
of in March – most of this is in analyst models, in our view.
Geological, regulatory and execution risks remain. We reinstate
our coverage with a NEUTRAL rating.
We resume coverage of Cairn India with a NEUTRAL rating and a
target price of Rs322, based on CS’ long-term crude oil forecast of
US$80/bbl.
To be or not to be
Irrespective of whether the CNE-VED deal goes through, CAIL’s stock
could do well in the near term, in our view. If the deal is approved and
the open offer is made, CAIL could trade up closer to the open offer
price of Rs355/share. For this to happen, necessary government
approvals must come within the next few weeks. We think CAIL will
unlikely accept the government’s demand to pay royalties (even if cost
recoverable) just to see the deal through. If the deal falls through,
tailwinds of crude price at US$100/bbl could also lead to a near-term
share price catch-up. At US$100/bbl flat, our CAIL NAV would be
Rs394/share. CAIL has, in the past, also traded at valuations implying
crude prices higher than spot.
Little operational upside
In its March 2010 release, CAIL outlined a vision to produce 240
kbopd, and published resource upside estimates for its Rajasthan
acreage, a large part of which has been incorporated in analyst
numbers, in our view. However, much work still needs to be done to
deliver these upside; geological, regulatory and execution risks remain
and disappointments could lead to erosion of upside expectations.
News flow on successes may not impact stock much. If the deal goes
through, CAIL’s use of cash under new management would also affect
the medium-term outlook
How much higher?
With core operations unlikely to surprise, crude prices remain the
largest potential stock driver. Average crude price of higher than
US$100/bbl should be difficult to sustain, given the impact on a weak
global economy. CAIL is the only large pure crude oil investment
option available in India, and may sustain some premium valuation,
but the likelihood for operational surprises in the near-term is low. We
resume our coverage with a NEUTRAL rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India ---------------------------------------------------- Reinstating Coverage with NEUTRAL
New report: Much already in the price
● We resume coverage of CAIL with a NEUTRAL rating and a target
price of Rs322 (Rs306 previously), which is based on CS’ longterm
crude oil forecast of US$80/bbl.
● We see a short-term trade in CAIL. If the CNE-VED deal is
approved, the stock could trade closer to the open offer price of
Rs355; if the deal falls through, tailwinds of crude at US$100/bbl
(i.e., our NAV estimate would be Rs394) could lead to a catch-up.
● If the deal has to happen, necessary government approvals must
come in the next few weeks. We believe CAIL will unlikely accept
the government’s demand to pay royalties (even if cost
recoverable) just to see the deal through.
● The US$100/bbl crude price may not sustain. Resolution of the
Egypt situation could bring global spare capacity and inventory
levels back into focus. We also see little room for operational
surprises – CAIL has to now work to deliver on the upside it talked
of in March – most of this is in analyst models, in our view.
Geological, regulatory and execution risks remain. We reinstate
our coverage with a NEUTRAL rating.
We resume coverage of Cairn India with a NEUTRAL rating and a
target price of Rs322, based on CS’ long-term crude oil forecast of
US$80/bbl.
To be or not to be
Irrespective of whether the CNE-VED deal goes through, CAIL’s stock
could do well in the near term, in our view. If the deal is approved and
the open offer is made, CAIL could trade up closer to the open offer
price of Rs355/share. For this to happen, necessary government
approvals must come within the next few weeks. We think CAIL will
unlikely accept the government’s demand to pay royalties (even if cost
recoverable) just to see the deal through. If the deal falls through,
tailwinds of crude price at US$100/bbl could also lead to a near-term
share price catch-up. At US$100/bbl flat, our CAIL NAV would be
Rs394/share. CAIL has, in the past, also traded at valuations implying
crude prices higher than spot.
Little operational upside
In its March 2010 release, CAIL outlined a vision to produce 240
kbopd, and published resource upside estimates for its Rajasthan
acreage, a large part of which has been incorporated in analyst
numbers, in our view. However, much work still needs to be done to
deliver these upside; geological, regulatory and execution risks remain
and disappointments could lead to erosion of upside expectations.
News flow on successes may not impact stock much. If the deal goes
through, CAIL’s use of cash under new management would also affect
the medium-term outlook
How much higher?
With core operations unlikely to surprise, crude prices remain the
largest potential stock driver. Average crude price of higher than
US$100/bbl should be difficult to sustain, given the impact on a weak
global economy. CAIL is the only large pure crude oil investment
option available in India, and may sustain some premium valuation,
but the likelihood for operational surprises in the near-term is low. We
resume our coverage with a NEUTRAL rating.
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