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Cairn India Limited
Cairn stake sale - government not ready
Sensitivity of Cairn’s valuation to oil price, production, royalty and cess
We have captured the sensitivity of Cairn India’s price target and EPS estimates to
several parameters in Table 1 (page 2). We arrive at our current PT of Rs375/share
by assuming long term oil price at $85/bbl, peak production of 210kbopd, no
royalty burden on Cairn and cess at Rs927/ton. In the best case our PT is Rs 448
and occurs when oil prices touch $100/bbl and in the worst case it falls to Rs300
when we reduce our peak production to the approved level of 125kbopd.
No certainty on cess and royalty
At present, Cairn pays a cess of $7.41/bbl under protest; the company holds that it
should not be paying cess while GoI’s case is that it should pay current cess at
$7.41/bbl. Our PT would be reduced by Rs 23/share if Cairn India is required to
pay cess at the higher rate (vs our $2.75/bl). Similarly, if royalty becomes cost
recoverable, (currently borne by ONGC) then our PT would reduce to Rs
312/share.
Approval for Vedanta group bid still pending
Cairn Energy holds a 62% stake in Cairn India, with another 15% held by Petronas.
Cairn Energy has been in talks with Vedanta group since Aug’10 to sell its stake in
Cairn India. However, the deal is still awaiting GoI’s approval. We don’t see
positive stock sentiment until the matter of the Vedanta deal is cleared.
Valuation: Maintain SOTP based PT of Rs375 and Neutral rating
The stock is highly leveraged to crude prices which we assume at US$85/bbl. We
expect stock sentiment to remain dampened until signs of government decision
making on pending issues are visible. On balance, we believe the weight of risk to
our PT is to the downside.
Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
Statement of Risk
Oil price and regulation are the major risks to the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cairn India Limited
Cairn stake sale - government not ready
Sensitivity of Cairn’s valuation to oil price, production, royalty and cess
We have captured the sensitivity of Cairn India’s price target and EPS estimates to
several parameters in Table 1 (page 2). We arrive at our current PT of Rs375/share
by assuming long term oil price at $85/bbl, peak production of 210kbopd, no
royalty burden on Cairn and cess at Rs927/ton. In the best case our PT is Rs 448
and occurs when oil prices touch $100/bbl and in the worst case it falls to Rs300
when we reduce our peak production to the approved level of 125kbopd.
No certainty on cess and royalty
At present, Cairn pays a cess of $7.41/bbl under protest; the company holds that it
should not be paying cess while GoI’s case is that it should pay current cess at
$7.41/bbl. Our PT would be reduced by Rs 23/share if Cairn India is required to
pay cess at the higher rate (vs our $2.75/bl). Similarly, if royalty becomes cost
recoverable, (currently borne by ONGC) then our PT would reduce to Rs
312/share.
Approval for Vedanta group bid still pending
Cairn Energy holds a 62% stake in Cairn India, with another 15% held by Petronas.
Cairn Energy has been in talks with Vedanta group since Aug’10 to sell its stake in
Cairn India. However, the deal is still awaiting GoI’s approval. We don’t see
positive stock sentiment until the matter of the Vedanta deal is cleared.
Valuation: Maintain SOTP based PT of Rs375 and Neutral rating
The stock is highly leveraged to crude prices which we assume at US$85/bbl. We
expect stock sentiment to remain dampened until signs of government decision
making on pending issues are visible. On balance, we believe the weight of risk to
our PT is to the downside.
Cairn India Limited
Cairn India is a subsidiary of Cairn Energy PLC, a UK-based crude oil and
natural gas E&P company. Cairn India owns 11 oil and gas blocks that include
producing, development and exploration assets. Rajasthan block RJ-ON-90/1, in
which it has a 70% stake contributes a significant proportion of Cairn India's
total production. In August 2010, the Vedanta Group made a bid to buy
management control of Cairn India by buying Cairn Energy's stake in the
company. The Vedanta Group is waiting for government approval.
Statement of Risk
Oil price and regulation are the major risks to the company.
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