Cairn India:: Favourable tide, but stationary ship : Nomura

Stock ignoring favourable oil
price, weak INR, and resource
upsides on elevated concerns


Potential upside +21.4%
Action: We like CAIR for RJ resource upside, but stock is weighed
down by concerns on RJ ramp-up, cash usage, and Cairn Plc stake
sale; recent promoter stake pledge adds to concerns
Despite favourable oil price and INR, CAIR’s performance has been
lackadaisical. Over the last year, oil in INR terms is up 10%, but CAIR is
down 5% (Sensex is up 19%). We continue to believe in resource upside
at Rajasthan (RJ) block. However, for the stock to move out of the current
trading band, we think investors need further confidence in the RJ rampup, and capex and cash usage plans. Moreover, the stake sale by Cairn
Plc remains an overhang. Recently, the promoter group pledged 65.8% of
its 58.8% holding in CAIR (38.7% of total equity), and this adds to
overhang, in our view.

��

-->
1Q in line; RJ production now at 180kbpd; net cash USD3.2bn
1Q numbers were largely in line. EBITDA was 1% ahead, PBT 2% ahead,
and PAT 4% ahead due to lower tax. Gross oil and gas production
increased 5% q-q, driven by Cambay and RJ. For 1Q, RJ production was
173kbpd (169 in 4Q). It has now increased to 180kbpd, and CAIR remains
confident of meeting FY14 exit guidance of 200-215kbpd at RJ. The
government’s profit petroleum for DA1 area has now increased to 30%.
Catalysts: Govt approvals, higher dividend, Share buyback
Valuation: Upgrade earning by 13-19% on weaker INR assumption
We now assume weaker currency at INR60/USD (earlier 55) for FY14-16.
We also fine-tune our model for the FY13 annual report. Weaker currency
assumption is the key reason for our earnings increase of 13-19% for
FY14-15F. Our revised TP is INR375 (INR350 earlier). Maintain Buy.

1Q results and conference call takeaways
In-line result; EBITDA 1% above our estimate
• Reported PAT of INR31.3bn (down 18% y-y, up 22% q-q) was 4% ahead of our
estimate of INR29.9bn.
• Sequentially, gross operated production increased 5% q-q. The increase was driven by
higher production at Cambay 10.6kboepd (up 72% q-q, due to new infill wells coming
online) and RJ block (production increased from 169kbpd in 4Q to 173kbpd in 1Q). The
company now does not provide field breakup in RJ block but indicated that increases
were driven by all producing fields of Mangala well.
• The company recognised foreign exchange mark-to-market gains of INR6.8bn on
nearly USD1bn of U.S. dollar deposits.
• As of the end of June 2013, the company had net cash balance of USD3.16bn, of
which nearly USD1bn remains in U.S. dollar deposits.
Remains confident in FY14 exit guidance of 200-215kbpd
• Management indicated that RJ block production has already increased to 180kbpd. It
remains confident of achieving guidance of 200-215kbpd for FY14 exit.
• It has three development rigs (two were added in 1Q) and is planning to add three
more by FY14. During 1Q, it drilled 16 development wells.
• For ramping and sustaining production, CAIR has acapex plan of USD1.6bn (net to
CAIR) over the next three years. This will include 350 development wells and
associated facilities.
• The approval of the Mangala polymer enhanced oil recovery (EOR) field development
plan (FDP) is at the operating committee level. This is expected to be implemented in
FY15.
• The company expects to commence production from Barmer hill and two satellite fields
(NI and NE) in FY14, subject to approvals.
Exploration gathering momentum to target 530 mmboe of prospective resource
• CAIR is planning to drill 100 exploration and appraisal wells in the next three years to
monetise 530mmboe of gross prospective resources in RJ block.
• During 1Q, two exploration and one appraisal wells were drilled. The company currently
has one exploration rig and is planning to add three more by end-FY14.
SOTP valuation
We continue to value Cairn India on a sum-of-the-parts valuation methodology.
We calculate the NAV of key fields under production: MBARS (Mangala, Bhagyam,
Aishwariya, Rageshwari, Saraswati) and 20 other key discoveries (mainly Barmer Hills)
using a discounted cash flow (DCF) methodology. Our NAV for these discovered fields is
now INR215/share (earlier INR202/share).
We continue to value prospective resources of 1.8bboe (assume 10% recovery) at
USD6/boe. We assign a value of USD6/boe to exploration upsides (prospective
recoverable resources of 530mmboe – Cairn share of 371mmboe – assume 50%
recovery).
We value large net cash at 20% discount.
Our SOTP-based NAV for Cairn India is INR376/share. Our revised target price is
INR375 (INR350 earlier)