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Cairn India (CAIL.BO, Neutral)
What happened
We downgrade Cairn India to Neutral from Buy as we believe that oil
markets are approaching a potential demand rationing range of oil
prices and we see more compelling risk-reward elsewhere in the sector.
With limited upside potential for global crude oil prices, we see higher
potential upside in defensive names such as ONGC and HPCL. Since we
upgraded CAIL to our Buy list on July 30, 2010, the stock has gained
4.0% vs. a gain of 9.6% on the Sensex. (12-mth: 17.0% vs. 10.7%). The
stock underperformed the Sensex mainly on account of the Cairn
Vedanta deal overhang, in our view.
Current view
We continue to believe Cairn India is best placed in its peer group to
take exposure to the improving oil markets owing to high earnings
leverage to oil prices, and strong oil production growth through its
Rajasthan block. However, with oil prices having moved up by 45% in
the last 6 months and spot Brent at around US$120/bbl vs. our FY12
estimate of US$102.5/bbl, we see more compelling risk-reward
elsewhere in the sector.
We believe more clarity on Cairn’s long-term growth strategy under a
new parent would be important for investors as we estimate Cairn to
generate annual free cash flow of US$2.5bn-US$3.0bn from FY12E
onwards, with no known reinvestment opportunities.
We maintain our 12-month NAV-based price target of Rs395 implying
14% potential upside from current levels. We note that the stock
currently implies long-term Brent of US$76/bbl from FY13E onwards,
and we have used a normalized Brent price of US$85/bbl from FY14E
onwards, with Cairn’s realization at 15% discount. We have revised our
FY12E-FY13E earnings by 0%-6% to reflect higher production from
legacy fields by the use of EOR schemes and lower costs.
Key risks
Upside: 1) Unexpected exploration upside; 2) earlier-than-expected
Mangla ramp-up; 3) rise in crude prices. Downside: 1) Fall in crude
prices; 2) Delay in production ramp-up; 3) any adverse regulatory
developments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIL.BO, Neutral)
What happened
We downgrade Cairn India to Neutral from Buy as we believe that oil
markets are approaching a potential demand rationing range of oil
prices and we see more compelling risk-reward elsewhere in the sector.
With limited upside potential for global crude oil prices, we see higher
potential upside in defensive names such as ONGC and HPCL. Since we
upgraded CAIL to our Buy list on July 30, 2010, the stock has gained
4.0% vs. a gain of 9.6% on the Sensex. (12-mth: 17.0% vs. 10.7%). The
stock underperformed the Sensex mainly on account of the Cairn
Vedanta deal overhang, in our view.
Current view
We continue to believe Cairn India is best placed in its peer group to
take exposure to the improving oil markets owing to high earnings
leverage to oil prices, and strong oil production growth through its
Rajasthan block. However, with oil prices having moved up by 45% in
the last 6 months and spot Brent at around US$120/bbl vs. our FY12
estimate of US$102.5/bbl, we see more compelling risk-reward
elsewhere in the sector.
We believe more clarity on Cairn’s long-term growth strategy under a
new parent would be important for investors as we estimate Cairn to
generate annual free cash flow of US$2.5bn-US$3.0bn from FY12E
onwards, with no known reinvestment opportunities.
We maintain our 12-month NAV-based price target of Rs395 implying
14% potential upside from current levels. We note that the stock
currently implies long-term Brent of US$76/bbl from FY13E onwards,
and we have used a normalized Brent price of US$85/bbl from FY14E
onwards, with Cairn’s realization at 15% discount. We have revised our
FY12E-FY13E earnings by 0%-6% to reflect higher production from
legacy fields by the use of EOR schemes and lower costs.
Key risks
Upside: 1) Unexpected exploration upside; 2) earlier-than-expected
Mangla ramp-up; 3) rise in crude prices. Downside: 1) Fall in crude
prices; 2) Delay in production ramp-up; 3) any adverse regulatory
developments.
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