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Cairn India Ltd. (CAIL.BO) Rs280.00
Equity Research
Moving towards positive production updates, reiterate Buy
News
The ONGC Board today decided to issue a NOC (No Objection Certificate)
to Cairn India for the proposed Cairn Energy- Vedanta deal. With some
minor approvals and just a few procedural matters left, we believe the
Cairn Energy-Vedanta deal is nearing completion.
Analysis
We expect positive operational updates going forward after the Vedanta
deal concludes and the deal overhang on the stock goes away. We expect
the focus to shift to development in the Rajasthan block going forward. We
believe that the regulatory approval for the next phase of volume growth
and the consequent production start-up at the Bhagyam field would
provide the near-term upside triggers for the stock. 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 a 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. However, we
note the acceptance of the condition that royalties become cost
recoverable would lead to a one time prior period charge of US$420mn
(about Rs20bn) in this quarter, impacting the 2QFY12 results to that extent.
Implications
We reiterate our Buy rating with 12-m NAV-based TP of Rs360, suggesting
upside of 28%. The key upside trigger for the stock, over the medium term,
could come from moving to a 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 calculate Cairn India would be worth Rs482/511/554
per share. Key risks are 1) delay in Rajasthan ramp-up; and 2) any adverse
regulatory developments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd. (CAIL.BO) Rs280.00
Equity Research
Moving towards positive production updates, reiterate Buy
News
The ONGC Board today decided to issue a NOC (No Objection Certificate)
to Cairn India for the proposed Cairn Energy- Vedanta deal. With some
minor approvals and just a few procedural matters left, we believe the
Cairn Energy-Vedanta deal is nearing completion.
Analysis
We expect positive operational updates going forward after the Vedanta
deal concludes and the deal overhang on the stock goes away. We expect
the focus to shift to development in the Rajasthan block going forward. We
believe that the regulatory approval for the next phase of volume growth
and the consequent production start-up at the Bhagyam field would
provide the near-term upside triggers for the stock. 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 a 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. However, we
note the acceptance of the condition that royalties become cost
recoverable would lead to a one time prior period charge of US$420mn
(about Rs20bn) in this quarter, impacting the 2QFY12 results to that extent.
Implications
We reiterate our Buy rating with 12-m NAV-based TP of Rs360, suggesting
upside of 28%. The key upside trigger for the stock, over the medium term,
could come from moving to a 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 calculate Cairn India would be worth Rs482/511/554
per share. Key risks are 1) delay in Rajasthan ramp-up; and 2) any adverse
regulatory developments.
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