| Cairn India Limited (CAIR IN) Interim CEO resigns | Neutral Price: Rs335.15 30 Apr 2014 Price Target: Rs385.00 PT End Date: 31 Mar 2015 | |
Cairn India announced that Mr. P. Elango, interim CEO and whole-time director has resigned from the company, citing personal reasons. Mr. Sudhir Mathur, the current CFO, will assume the additional role of CEO in the interim. The press release also states that Mr. Tom Albanese (CEO of Vedanta Resources) and Mike Yeager (Chairman of Cairn India’s operations review board) will continue to work closely with the management team.
· No full time CEO appointed as yet: Mr. P. Elango, the interim CEO has resigned his position citing personal reasons. While no full time CEO appointment has been made, the company announced that Mr. Sudhir Mathur (CFO) will assume become the interim CEO. Mr. Mathur’s background prior to joining Cairn India centers on the telecom and infrastructure/industrials industries.
· Close partnership with promoter group management to continue: The management of the company will work closely with Mr. Tom Albanese (CEO of Vedanta Resources), and Mike Yeager (Chairman of Cairn India’s operations review board, and ex head of the global petroleum business at BHP Billiton), highlighting the close partnership with promoter group management.
· Stock direction: While Cairn has a high-quality resource base of high-margin barrels, we remain cautious on medium term growth, with slower production growth, and possible execution risks. A correction in crude prices is also a near-term risk; however, acceleration in the stock buyback program could limit downside.
Investment Thesis
While Cairn retains a high-quality resource base of high-margin barrels, we are cautious on medium-term growth, with a slower pace of production growth, and potential execution risks. With leverage to elevated crude prices, and a discount to peers, we see an entry opportunity into Cairn at levels nearer INR320, where the buyback should limit downside. We expect that a continued focus on shareholder returns is essential to close the valuation gap – as such, newsflow on corporate restructuring/shareholding would also guide stock performance.
Valuation
We have a Neutral rating and Mar-15 PT of Rs385. 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. Key upside risks are better-than-expected production growth, sustained high oil prices and better-than-expected exploration results.
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