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EARNINGS REVIEW
Cairn India Ltd. (CAIL.BO)
Buy
Above expectations; further volume ramp-up, exploration are key
What surprised us
Cairn India reported 2QFY11 adjusted net profit of Rs16.1 bn, up almost 4
times qoq and above our estimate of Rs15.5 bn, primarily driven by lower
operating costs and lower taxes. During 2Q, Mangala production averaged
116.1K b/d, in line with our estimate, but oil realization was marginally
higher at an 11% discount to Brent vs. our estimate of 12%. While
Rajasthan operating cost of US$2.5/bbl was below our estimate, the
company kept its cost guidance at US$5/bbl, as work over costs will likely
add to operating costs going forward. The company also clarified that
contrary to media speculation, its 2011 exploration budget has not been
disapproved by oil regulators and is currently under routine discussions.
Cairn India indicated that it is on track to ramp-up Rajasthan production to
175 K b/d from current 125 K b/d by end of CY11E, likely entirely from
Mangala and Bhagyam fields, while Aishwarya will likely be in 1HCY12E.
The company indicated that the current infrastructure can produce 150
Kb/d. Cairn India confirmed exploration success in onshore KG Basin in 2Q
and drilling in Sri Lanka and Palar basin is planned for 1HCY11E.
What to do with the stock
We maintain our Buy rating on Cairn India with 12-m NAV-based TP of
Rs375, implying upside of 18%. The stock is implying long-term Brent of
US$73/bbl from FY14E onwards vs. our forecast of US$85/bbl. We expect
Cairn to generate annual free cash flow of US$2.5-$3.0bn from FY12E
onwards. Key risks: (1) delay in Rajasthan production ramp-up; (2) any
adverse regulatory development; and (3) reserve recovery potential in
exploratory blocks and Barmer Hill zone.
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