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The stock trades below our estimated value of known reserves, leaving room for exploration
upside while adequately discounting the risks of delays in government approval and use of cash.
That said, 2QFY12 reported profits should drop due to a one-time royalty adjustment. Maintain
TP of Rs310; upgrade to Buy.
We expect clarity on production growth to emerge soon
Crude production from the Rajasthan block has stagnated at 125kbd since 2QFY11 due to lack of
approvals from the Indian government (GOI) and ONGC. With Cairn India (CIL) shareholders
acceding to GOI demands on royalty cost recoverability (which should make the block highly
profitable for ONGC) and dropping of cess arbitration, we expect approvals for production growth
to come through. Specifically, we expect Bhagyam to start producing this quarter, achieving its
approved production of 40kbd by end-December 2011, and Mangala to ramp up from 125kbd to
150kbd from January 2012.
One-off bump due to royalty adjustment in 2QFY12F
Operationally, we expect 2QFY12 to be a stable quarter, with Rajasthan production flat qoq at
125kbpd. However, we expect EPS of Rs2.6 (- 82% qoq) due to a one-time adjustment
(US$259m) for royalty that was not accounted as cost recoverable until 1QFY12. Excluding this
adjustment, we estimate 2QFY12 EPS of Rs8.4 (the sustainable run rate, in our view).
Upgrade to Buy, TP unchanged at Rs310
CIL currently trades below our estimated value of known reserves (Rs288/share, using a
USD/INR rate of 45). Note that rupee depreciation has a direct positive impact on valuations. Our
unchanged target price of Rs310 builds in some upside potential from higher EOR/IOR recovery
(20% recovery vs current management guidance of 15% of in-place MBA) and excludes any
upside potential from the block in Sri Lanka where CIL has recently made a gas discovery. On
our reserve base estimate, the stock discounts a Brent oil price of US$75/bbl (from FY14F
onwards) which provides a margin of safety to capture the risks of delays in GOI approval and
use of cash. We remain optimistic on growth prospects in Rajasthan. Even the CAG audit report
indicates that CIL is optimistic on the possibility of Rajasthan peak production rising to 300kbd (vs
our current estimate of 240kbd).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
The stock trades below our estimated value of known reserves, leaving room for exploration
upside while adequately discounting the risks of delays in government approval and use of cash.
That said, 2QFY12 reported profits should drop due to a one-time royalty adjustment. Maintain
TP of Rs310; upgrade to Buy.
We expect clarity on production growth to emerge soon
Crude production from the Rajasthan block has stagnated at 125kbd since 2QFY11 due to lack of
approvals from the Indian government (GOI) and ONGC. With Cairn India (CIL) shareholders
acceding to GOI demands on royalty cost recoverability (which should make the block highly
profitable for ONGC) and dropping of cess arbitration, we expect approvals for production growth
to come through. Specifically, we expect Bhagyam to start producing this quarter, achieving its
approved production of 40kbd by end-December 2011, and Mangala to ramp up from 125kbd to
150kbd from January 2012.
One-off bump due to royalty adjustment in 2QFY12F
Operationally, we expect 2QFY12 to be a stable quarter, with Rajasthan production flat qoq at
125kbpd. However, we expect EPS of Rs2.6 (- 82% qoq) due to a one-time adjustment
(US$259m) for royalty that was not accounted as cost recoverable until 1QFY12. Excluding this
adjustment, we estimate 2QFY12 EPS of Rs8.4 (the sustainable run rate, in our view).
Upgrade to Buy, TP unchanged at Rs310
CIL currently trades below our estimated value of known reserves (Rs288/share, using a
USD/INR rate of 45). Note that rupee depreciation has a direct positive impact on valuations. Our
unchanged target price of Rs310 builds in some upside potential from higher EOR/IOR recovery
(20% recovery vs current management guidance of 15% of in-place MBA) and excludes any
upside potential from the block in Sri Lanka where CIL has recently made a gas discovery. On
our reserve base estimate, the stock discounts a Brent oil price of US$75/bbl (from FY14F
onwards) which provides a margin of safety to capture the risks of delays in GOI approval and
use of cash. We remain optimistic on growth prospects in Rajasthan. Even the CAG audit report
indicates that CIL is optimistic on the possibility of Rajasthan peak production rising to 300kbd (vs
our current estimate of 240kbd).
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