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Buy
Cairn India Ltd. (CAIL.BO)
Return Potential: 24% Equity Research
Production ramp-up in sight, improved risk-reward, upgrade to Buy
Source of opportunity
We upgrade Cairn India to Buy from Neutral as we expect positive
operational updates going forward after the Vedanta deal concludes this
month and the deal overhang on the stock goes away. We forecast growth
of Cairn’s production volumes by 2X between FY11-FY14E and estimate
Rajasthan gross oil volumes to reach 175 Kb/d by Mar’12 and peak of 215
K b/d by Dec’12 from the current 125Kb/d – one of the best growth profiles
among the emerging market “oily” stocks. We also expect exploration
updates both in Sri Lanka and Rajasthan in coming quarters. We note that
Cairn India has under-performed the Asian oil peers over past 12 months.
Catalyst
1) Regulatory approval for next phase of volume growth; 2) Production
start-up at the Bhagyam field; 3) Updates on exploration in Sri Lanka in
3QFY12E; 4) Exploration update in Rajasthan outside production area.
Valuation
We revise our FY12E/13E/14E EPS by -31%/-28%/-13% to reflect royalty for
the Rajasthan Block becoming cost recoverable. Consequently, we revise
our 12-m NAV-based TP to Rs360 (from Rs405 earlier), still implying upside
of 25%. We estimate that Cairn stock is currently implying long term Brent
price of US$72/bbl from FY13E into perpetuity. We estimate annual free
cash flow of US$2.0+bn from FY13E.
The key upside trigger for the stock, over medium term, could come from
moving to going concern valuation from the current asset-based valuation,
in our view. For that, we would need clarity on: 1) reserve replacement, 2)
diversification of asset base and 3) sustainability of production profile. As
an ongoing concern with peak production of 240/270/300Kb/d, we estimate
our valuation of Cairn India would be higher at Rs482/511/554.
Key risks
1) Delay in Rajasthan ramp-up; 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy
Cairn India Ltd. (CAIL.BO)
Return Potential: 24% Equity Research
Production ramp-up in sight, improved risk-reward, upgrade to Buy
Source of opportunity
We upgrade Cairn India to Buy from Neutral as we expect positive
operational updates going forward after the Vedanta deal concludes this
month and the deal overhang on the stock goes away. We forecast growth
of Cairn’s production volumes by 2X between FY11-FY14E and estimate
Rajasthan gross oil volumes to reach 175 Kb/d by Mar’12 and peak of 215
K b/d by Dec’12 from the current 125Kb/d – one of the best growth profiles
among the emerging market “oily” stocks. We also expect exploration
updates both in Sri Lanka and Rajasthan in coming quarters. We note that
Cairn India has under-performed the Asian oil peers over past 12 months.
Catalyst
1) Regulatory approval for next phase of volume growth; 2) Production
start-up at the Bhagyam field; 3) Updates on exploration in Sri Lanka in
3QFY12E; 4) Exploration update in Rajasthan outside production area.
Valuation
We revise our FY12E/13E/14E EPS by -31%/-28%/-13% to reflect royalty for
the Rajasthan Block becoming cost recoverable. Consequently, we revise
our 12-m NAV-based TP to Rs360 (from Rs405 earlier), still implying upside
of 25%. We estimate that Cairn stock is currently implying long term Brent
price of US$72/bbl from FY13E into perpetuity. We estimate annual free
cash flow of US$2.0+bn from FY13E.
The key upside trigger for the stock, over medium term, could come from
moving to going concern valuation from the current asset-based valuation,
in our view. For that, we would need clarity on: 1) reserve replacement, 2)
diversification of asset base and 3) sustainability of production profile. As
an ongoing concern with peak production of 240/270/300Kb/d, we estimate
our valuation of Cairn India would be higher at Rs482/511/554.
Key risks
1) Delay in Rajasthan ramp-up; 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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