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Cairn India (CAIR)
Energy
Good crude and Rupee hedge. We expect Cairn’s E&P portfolio to be boosted by the
potential commerciality of recent gas discoveries in Sri Lanka. Near-term stock
performance will likely be driven by (1) crude oil prices, (2) exchange rate movement
and (3) ramp-up of production from Rajasthan block. We maintain our REDUCE rating
on the stock with a revised target price of `315/share (`300 previously). However, we
see potential upside risks to our fair value of Cairn India from (1) potential gas resource
in Sri Lanka and (2) higher recovery of crude oil from the key Rajasthan block.
Second discovery in Sri Lanka
We see the positive results in Sri Lanka as giving confidence on the prospects of Cairn’s E&P
portfolio. Cairn India has recently announced its second discovery in block SL 2007-01-001 in
Mannar Basin, Sri Lanka. The company has indicated a gross hydrocarbon column of 24 meters for
the discovery, which includes natural gas and liquid hydrocarbons; we highlight that the first
discovery in the block had indicative gross hydrocarbon column of 25 meters. The commerciality of
announced discoveries will be established on further evaluation of drilling results after completion
of the three-well drilling program by end-CY2011. The management has guided to an
announcement regarding the commerciality of the discoveries in early CY2012E.
Weaker Rupee augurs well for the company
We expect Cairn India to benefit from a weakening of Rupee against US Dollar as it will increase
the revenues and in turn, profitability for the company. A `1/US$ depreciation of Indian Rupee will
positively impact Cairn’s earnings by about 3% and would result in FY2012E and FY2013E EPS at
`43/share and `52/share versus our base-case EPS estimates of `41.8/share and `50.6/share (see
Exhibit 1). We note that our fair valuation of Cairn India increases by `5/share for every `1/US$
depreciation in exchange rate in the long term (FY2015E onwards).
Current strength in crude oil prices positive but watch for moderate reversal in CY2012E
Cairn stock has historically shown high correlation with crude oil prices barring the phase of Cairn-
Vedanta transaction (see Exhibit 2). We note that the current stock price is discounting US$90/bbl
in perpetuity (see Exhibit 3). However, incremental non-OPEC supply (+1.1 mn b/d), OPEC NGLs
(+0.4 mn b/d) and Libya supply (+0.6-0.7 mn/d by end-CY2012 from current levels of ~0.53 mn
b/d) and likely weak demand (IEA estimate of incremental demand of 1.3 mn b/d appears high) in
CY2012E may result in some moderation in crude oil prices in CY2012 (see Exhibit 4).
Maintain REDUCE rating with a revised target price of `315
We revise our 12-month DCF-based target price for Cairn India to `315/share (`300 previously) to
reflect our weaker long-term Rupee assumption of `48/US$ versus `45/US$ previously. We
maintain our FY2012E, FY2013E at and FY2014E EPS estimates at `41.8, `50.6 and `41.4.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
Good crude and Rupee hedge. We expect Cairn’s E&P portfolio to be boosted by the
potential commerciality of recent gas discoveries in Sri Lanka. Near-term stock
performance will likely be driven by (1) crude oil prices, (2) exchange rate movement
and (3) ramp-up of production from Rajasthan block. We maintain our REDUCE rating
on the stock with a revised target price of `315/share (`300 previously). However, we
see potential upside risks to our fair value of Cairn India from (1) potential gas resource
in Sri Lanka and (2) higher recovery of crude oil from the key Rajasthan block.
Second discovery in Sri Lanka
We see the positive results in Sri Lanka as giving confidence on the prospects of Cairn’s E&P
portfolio. Cairn India has recently announced its second discovery in block SL 2007-01-001 in
Mannar Basin, Sri Lanka. The company has indicated a gross hydrocarbon column of 24 meters for
the discovery, which includes natural gas and liquid hydrocarbons; we highlight that the first
discovery in the block had indicative gross hydrocarbon column of 25 meters. The commerciality of
announced discoveries will be established on further evaluation of drilling results after completion
of the three-well drilling program by end-CY2011. The management has guided to an
announcement regarding the commerciality of the discoveries in early CY2012E.
Weaker Rupee augurs well for the company
We expect Cairn India to benefit from a weakening of Rupee against US Dollar as it will increase
the revenues and in turn, profitability for the company. A `1/US$ depreciation of Indian Rupee will
positively impact Cairn’s earnings by about 3% and would result in FY2012E and FY2013E EPS at
`43/share and `52/share versus our base-case EPS estimates of `41.8/share and `50.6/share (see
Exhibit 1). We note that our fair valuation of Cairn India increases by `5/share for every `1/US$
depreciation in exchange rate in the long term (FY2015E onwards).
Current strength in crude oil prices positive but watch for moderate reversal in CY2012E
Cairn stock has historically shown high correlation with crude oil prices barring the phase of Cairn-
Vedanta transaction (see Exhibit 2). We note that the current stock price is discounting US$90/bbl
in perpetuity (see Exhibit 3). However, incremental non-OPEC supply (+1.1 mn b/d), OPEC NGLs
(+0.4 mn b/d) and Libya supply (+0.6-0.7 mn/d by end-CY2012 from current levels of ~0.53 mn
b/d) and likely weak demand (IEA estimate of incremental demand of 1.3 mn b/d appears high) in
CY2012E may result in some moderation in crude oil prices in CY2012 (see Exhibit 4).
Maintain REDUCE rating with a revised target price of `315
We revise our 12-month DCF-based target price for Cairn India to `315/share (`300 previously) to
reflect our weaker long-term Rupee assumption of `48/US$ versus `45/US$ previously. We
maintain our FY2012E, FY2013E at and FY2014E EPS estimates at `41.8, `50.6 and `41.4.
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