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CAIRN INDIA LTD. (CIL)
PRICE: RS.281 RECOMMENDATION: BUY
TARGET PRICE: RS.330 FY12E P/E: 5.9X
ONGC gives nod to Cairn India-Vedanta deal, but with riders
q ONGC has finally decided to grant No-Objection Certificate (NOC) for the
proposed deal of Vedanta Resources acquisition of Cairn India, along
with this ONGC will surrender its option of exercising pre-emptive rights.
However, all this is subject to Cairn India, Vedanta and affiliates formally
agreeing to share royalty and cess burden (Rs 2,500 per tonne plus taxes)
with respect to RJ-ON-90/1.
q In Sep'11, in a postal ballot, 97 percent of Cairn India's shareholders including
Cairn Energy Plc. (52.1 percent) and Vedanta (28.5 percent) had
voted for acceptance of the government conditions provided ONGC gives
NOC. On 30th Jun'11, the cabinet has approved the deal between
Vedanta and Cairn India and indicated to close the same by Sep'11 end.
q Cairn will get NOC for RJ-ON-90/1, PR-OSN-2004/1 (Palar region), KG-ONN-
2003/1 (Krishna-Godavari Basin), KK-DWN-2004/1 (Kerala-Konkan region)
and KG-DWN-98/2 blocks (Krishna-Godavari Basin).
q We believe this has already been priced in and now market will focus
more on Cairn India getting government approval for ramping up its oil
production from Rajasthan block.
q Recent stock price correction is mainly due to significantly delay in getting
deal approval, crude oil price correction and delay in getting government
approval for ramping-up of oil production, we opine.
Government approval for production ramping up will be the key
n Management comments suggested that the crude oil production from Mangala
can be ramped up to 150 kbopd from 125 kbopd immediately, subject to government
approval. However, we believe the approval from government can take
some more time.
n The Mangala processing terminal nameplate capacity is expected to be 205
kbopd, post commissioning of the fourth processing train in Q4 CY11.
n Management guided Bhagyam field to start production in Q4CY2011 and reach
plateau rate of 40Kbopd by end of CY11 (subject to approval).
Change in view on commodity prices
Looking at the current global environment, we are marginally bearish on crude oil
prices and expect Brent crude oil price to trade in the range of $110-115/bbls in
FY12 and may correct to $90-95/bbls in FY13 mainly due to slowing global GDP,
dying expectation of QE3 and lower consumption in developed economies. Accordingly,
we have tweaked our assumptions. We also believe the recent stock price
correction captures general market consensus building up for commodity price decline.
Higher recovery estimate for other fields in Rajasthan will be
positive
Recently, Cairn management has indicated that recovery estimate for other fields in
Rajasthan will be declared in the next 2-3 years which we believe will be positive for
the company. The Company is positive on Barmer hill and stressed its high potential,
despite tighter geologies than the MBA fields. However, on a conservative note we
have not considered this in our valuation.
Overseas Assets can be game changer
The management has guided that the result of expansion drilling campaign in the
frontier Mannar basin in Sri Lanka block can be expected in March 2012. In Aug'11,
the frontier exploration drilling campaign commenced. We are bullish on the prospects
of Sri Lanka block but it's too pre-mature to consider the same in valuations.
Valuations and Key assumptions
n Cash (Net debt) as on 30th June '11 was Rs.45.8 Bn.
n We expect FY12E EPS of Rs.47.6 and FY13E EPS of Rs.54.5 (earlier Rs.58.9)
n CIL is in the process of facilitating a dividend policy but it is subject to regulatory
approvals.
n Stock is attractively valued at 4.09x EV/EBIDTA and 5.9x P/E based on FY12E
earnings estimates.
n We have reworked on our valuation model with revised crude oil price assumption.
Based on the same, we arrived at a fair value of the stock at Rs..330/Share
(earlier Rs.343/share) and we recommend BUY (earlier ACCUMULATE) on Cairn
India.
In the last one year, the Brent crude oil price has surged by 39.7% as against this
Cairn's stock has given -16% return this is mainly due to concern regarding royalty
and cess issue, delay in getting approval for the deal, general market consensus for
commodity price decline and change in ownership.
Key Assumption:
n Rajasthan block is expected to produce 102Kbopd net crude oil in FY12E.
n We have not changed our FY12E crude oil price assumption of $110/bbls but
have revised crude oil price assumption for FY13E downwards to $90/bbls (earlier
of $95/bbls).
n Cairn's realization is assumed at 10% discount.
n We have assumed $8.4/bbls as production cost and pipeline cost for FY12E and
$5/bbls for FY13E. Management has guided for $5/bbls.
n We have considered royalty and cess as cost recoverable.
n Government share in the profit petroleum based on investment multiple is expected
to start from FY13E onwards.
n We have assumed WACC of 13.8%.
In the last one year, both Cairn and BSE Oil and Gas index has given negative return.
Cairn has given a negative return of ~16% as against 22% negative return by
BSE Oil and Gas Index.
Key risk remains -
n Any significant fall in the crude oil prices will impact the realization.
n Exchange fluctuation risk
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact over valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAIRN INDIA LTD. (CIL)
PRICE: RS.281 RECOMMENDATION: BUY
TARGET PRICE: RS.330 FY12E P/E: 5.9X
ONGC gives nod to Cairn India-Vedanta deal, but with riders
q ONGC has finally decided to grant No-Objection Certificate (NOC) for the
proposed deal of Vedanta Resources acquisition of Cairn India, along
with this ONGC will surrender its option of exercising pre-emptive rights.
However, all this is subject to Cairn India, Vedanta and affiliates formally
agreeing to share royalty and cess burden (Rs 2,500 per tonne plus taxes)
with respect to RJ-ON-90/1.
q In Sep'11, in a postal ballot, 97 percent of Cairn India's shareholders including
Cairn Energy Plc. (52.1 percent) and Vedanta (28.5 percent) had
voted for acceptance of the government conditions provided ONGC gives
NOC. On 30th Jun'11, the cabinet has approved the deal between
Vedanta and Cairn India and indicated to close the same by Sep'11 end.
q Cairn will get NOC for RJ-ON-90/1, PR-OSN-2004/1 (Palar region), KG-ONN-
2003/1 (Krishna-Godavari Basin), KK-DWN-2004/1 (Kerala-Konkan region)
and KG-DWN-98/2 blocks (Krishna-Godavari Basin).
q We believe this has already been priced in and now market will focus
more on Cairn India getting government approval for ramping up its oil
production from Rajasthan block.
q Recent stock price correction is mainly due to significantly delay in getting
deal approval, crude oil price correction and delay in getting government
approval for ramping-up of oil production, we opine.
Government approval for production ramping up will be the key
n Management comments suggested that the crude oil production from Mangala
can be ramped up to 150 kbopd from 125 kbopd immediately, subject to government
approval. However, we believe the approval from government can take
some more time.
n The Mangala processing terminal nameplate capacity is expected to be 205
kbopd, post commissioning of the fourth processing train in Q4 CY11.
n Management guided Bhagyam field to start production in Q4CY2011 and reach
plateau rate of 40Kbopd by end of CY11 (subject to approval).
Change in view on commodity prices
Looking at the current global environment, we are marginally bearish on crude oil
prices and expect Brent crude oil price to trade in the range of $110-115/bbls in
FY12 and may correct to $90-95/bbls in FY13 mainly due to slowing global GDP,
dying expectation of QE3 and lower consumption in developed economies. Accordingly,
we have tweaked our assumptions. We also believe the recent stock price
correction captures general market consensus building up for commodity price decline.
Higher recovery estimate for other fields in Rajasthan will be
positive
Recently, Cairn management has indicated that recovery estimate for other fields in
Rajasthan will be declared in the next 2-3 years which we believe will be positive for
the company. The Company is positive on Barmer hill and stressed its high potential,
despite tighter geologies than the MBA fields. However, on a conservative note we
have not considered this in our valuation.
Overseas Assets can be game changer
The management has guided that the result of expansion drilling campaign in the
frontier Mannar basin in Sri Lanka block can be expected in March 2012. In Aug'11,
the frontier exploration drilling campaign commenced. We are bullish on the prospects
of Sri Lanka block but it's too pre-mature to consider the same in valuations.
Valuations and Key assumptions
n Cash (Net debt) as on 30th June '11 was Rs.45.8 Bn.
n We expect FY12E EPS of Rs.47.6 and FY13E EPS of Rs.54.5 (earlier Rs.58.9)
n CIL is in the process of facilitating a dividend policy but it is subject to regulatory
approvals.
n Stock is attractively valued at 4.09x EV/EBIDTA and 5.9x P/E based on FY12E
earnings estimates.
n We have reworked on our valuation model with revised crude oil price assumption.
Based on the same, we arrived at a fair value of the stock at Rs..330/Share
(earlier Rs.343/share) and we recommend BUY (earlier ACCUMULATE) on Cairn
India.
In the last one year, the Brent crude oil price has surged by 39.7% as against this
Cairn's stock has given -16% return this is mainly due to concern regarding royalty
and cess issue, delay in getting approval for the deal, general market consensus for
commodity price decline and change in ownership.
Key Assumption:
n Rajasthan block is expected to produce 102Kbopd net crude oil in FY12E.
n We have not changed our FY12E crude oil price assumption of $110/bbls but
have revised crude oil price assumption for FY13E downwards to $90/bbls (earlier
of $95/bbls).
n Cairn's realization is assumed at 10% discount.
n We have assumed $8.4/bbls as production cost and pipeline cost for FY12E and
$5/bbls for FY13E. Management has guided for $5/bbls.
n We have considered royalty and cess as cost recoverable.
n Government share in the profit petroleum based on investment multiple is expected
to start from FY13E onwards.
n We have assumed WACC of 13.8%.
In the last one year, both Cairn and BSE Oil and Gas index has given negative return.
Cairn has given a negative return of ~16% as against 22% negative return by
BSE Oil and Gas Index.
Key risk remains -
n Any significant fall in the crude oil prices will impact the realization.
n Exchange fluctuation risk
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact over valuations.
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