CAIRN INDIA BUY ; Target Price- Rs. 458 ::Globe Capital Market

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   CAIRN INDIA              BUY                           CMP-349                               Target Price- Rs. 458

About the Company

Cairn India operates the largest oil producing field in the private sector with significant position in 11 blocks with new exploratory rights in India and Srilanka. It has a total of 874 mnboe 2P net oil & gas reserves with 95% coming from flagship Rajasthan block.

Cairn-Vedanta Deal overhang to reduce, going forward:

Cairn India is the only pure play Indian company on crude oil movement with all other PSU coming under the Subsidy model leading to below par realization. Post the announcement of Cairn-Vedanta deal, the share has come under pressure and has underperformed its peers by average 40%. We expect post the open offer and resolution of royalty issue and deal clearance next month; the stock will outperform the market and catch with its peers.

Increase in Rajasthan’s production and reserve accretion to drive growth  

The potential resource base from Rajasthan bloc stands at 6.5 bn boe with discovered resource base increased to 4 bn boe from 3.7 bn boe. The bloc has a potential to go upto 240,000 bopd subject to GOI approval, from currently at 125,000 bopd. The Rajasthan produces 70% of total Oil production with Opex (including pipeline cost) at $2.7 a barrel and DD&A cost at $7.2 a barrel. The company has spent $2.8 bn till now and further capex remains comfortable with net cash position of $194 mn.  

Royalty and cess dispute remain key risk

Currently, ONGC pays 100% royalty despite 30% interest in the Rajasthan field according to the contract. ONGC is contesting it is cost recoverable thus reducing Cairn’s profit oil share. Cairn pays 900/MT as cess on Rajasthan crude which is under dispute. Any ruling against can put pressure on the stock in near future.

Outlook & Valuation:

Carin India is the only pure play Indian company on the crude oil prices coupled with growing crude oil volumes with as new fields comes on-stream. There is possibility of substantial reserves accretion(announced annually) as they deploy new technologies (led to 4-5 fold increase in Raageshwari deep gas production).Crude oil is prone to supply shocks, difficulty of storage and low price elasticity of demand in the short term makes it lucrative. With the full cost of finding and delivery new oil stands about $70-80 a barrel, the new normal of crude oil above $100 remains a possibility. At CMP, stock trades at attractive territory with P/E of 7.24x and 6.44x FY12BE and FY13BE respectively while on EV/EBITDA, it quotes at 5.63 and 5.07x FY12BE and FY13BE respectively. We believe Cairn India will continue to surprise on result thus possibility of earning upgrade in future.We have valued Cairn India on P/E methodology to arrive at a price target of Rs.482(10XFY12BE).We recommend a BUY rating with a potential upside of 38% from current level.

Regards,
Archit Singhal
Research Analyst
Globe Capital Market Ltd