J.P. Morgan -Cairn India Limited

Cairn India Limited (CAIR IN) Vedanta update points to Cairn India’s operational delivery on track		Overweight Price: Rs351.00 09 Apr 2014 Price Target: Rs400.00 PT End Date: 30 Sep 2014

Vedanta’s quarterly production update reinforces our view that Cairn India’s production growth is on track. Rajasthan production 4Q averaged c.191kbopd (up 2.5% q/q), with production crossing 200kbopd in March – meeting company guidance. A continued rise in production, particularly meeting approved production rates at Bhagyam/Aishwarya would be an important component of meeting FY15E/16E production/earnings targets (JPMe – 220kbopd/250kbopd).

· Rajasthan output crosses 200kbopd: Vedanta stated that Rajasthan production for the quarter averaged c.191kbopd (up from c.186kbopd in Q3), with output likely rising at both Bhagyam and Aishwarya, and has crossed 200kbopd in March. Output for FY14 averaged 181.5kbopd.

· Continued ramp up of production important: Raising output at Bhagyam to approved levels (c.40kbopd) would be an important component of meeting FY15E/16E production target (JPMe – 220kbopd/250kbopd). Inability to reach the approved peak rate of 40kbopd would impact expectations of higher output in FY15, in our view. Bhagyam currently accounts for c.10-12% of Cairn’s Rajasthan output.

Figure 1: Rajasthan production (bopd)

Source: Company reports and J.P. Morgan estimates.

 

Investment Thesis

With a high-quality resource base of high-margin barrels, and strong potential organic production growth, with leverage to elevated crude prices, and a large discount to peers (c.50% on FY14E EV/EBITDA), we see Cairn as attractively priced. We expect earnings delivery to have a positive impact on stock performance, but concede that a continued focus on shareholder returns is essential to close the valuation gap – as such, newsflow on corporate restructuring/shareholding should also guide stock performance.

Valuation

We have an OW rating and Sep-14 PT of Rs400. Our PT is based on NAV. We use a risk-based methodology to arrive at an NAV estimate through a bottom-up approach. We have grouped Cairn India’s assets into two main categories: core NAV, which is the value of producing assets and those under development, and risked upside which is generated by the value of Cairn India’s exploration and appraisal (E&A) assets on a risked basis.

Risks to Rating and Price Target

Key downside risks are lower crude prices, upstream execution risk and F/X appreciation.

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