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CAIRN INDIA LTD. (CIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.378
FY12E P/E: 6.3X
q Cairn India has reported good set of Q3FY11 results which are in line
with our estimates on the profitability front. We had estimated a PAT of
Rs.20.17 Bn against which the Company has declared a PAT of Rs.20.10
Bn.
q Recently, ONGC has said that its consent is not required for the deal and
it will count on the oil ministry to ease its royalty burden.
q Q3FY11 was the first full year of Mangala approved plateau production
at 125 kbopd (55 wells are producing).
q CIL has sold more than 100 kbopd (Net working Interest) in Q3FY11
q In H2 CY11, the Mangala processing terminal nameplate capacity is expected
to be 205 kbopd.
q Cash (Net debt) as on 31st Dec'10 was Rs.8.7 Bn. The Company replaced
its rupee facility of Rs.40 Bn with a lower financing of Rs.22.5 Bn.
q We maintain our FY11E EPS of Rs.33.9 and FY12E EPS of Rs.49.9.
q Stock is cheaply valued at 4.89x EV/EBIDTA and 6.3x P/E based on FY12
earnings estimates
q The Brent crude oil price is trading around USD$100/bbls which is the
benchmark for Cairn's crude oil. With the rise in the international crude
oil price, the realization for the Company is also expected to improve.
However, the stock price had under-performed in spite of improving fundamentals
mainly due to the uncertainty over the Cairn-Vedanta deal
(royalty and cess payment). We expect that in the next three months, final
outcome of the deal should be declared.
q Based on the current valuations the stock is available very cheap and we
maintain our BUY on Cairn India with a price target of Rs.378/Share.
3QFY11 net profit in-line with our estimate
n Cairn India's revenues for Q3FY11 has increased 525% YoY and 15% QoQ basis
to Rs. 30.9 Bn while PAT has increased 591% YoY and 27% QoQ basis to
Rs.20.1 Bn in Q3FY11. EPS was Rs.10.6 for Q3FY11.
n Cash flow from operations had increased by 30% QoQ basis to Rs.20.4 Bn in
Q3FY11
n For Q3FY11, the operational profit was up 738% YoY and up 21% on sequential
basis to Rs.25.4 bn. In Q3FY11, the operating margin had increased by 20.9%
YoY and 3.6% QoQ to 82.09% and PAT margin stood at 64.9% in Q3FY11
showing an improvement of 6.2% YoY and 5.9% QoQ. This was primarily due to
better realizations and economies of scale. This is well reflected by lower operating
expenses to sales ratio. Operating expenses to sales ratio had declined to
14.8% in Q3FY11 as against 27.1% in Q3FY10 and 15.8% in Q2FY11.
n PBT for Q3FY11 was at Rs.22.1 bn up 538% YoY and up 28% on sequential
basis.
Rajasthan production details
n In Q3FY11, the average gross production from Rajasthan block was 124.9 Kbopd
as compared to 15.43 kbopd in Q3 FY10 and 116 Kbopd in Q2FY11 registering a
growth of 709% YoY and 7.6% QoQ basis.
Latest developments on Cairn-Vedanta deal
The Oil Ministry has imposed 11 pre-conditions on Cairn India and its prospective
buyer Vedanta Resources, for approving the deal. ONGC and Vedanta have shown
willingness to accept most of the conditions except the change in royalty obligations
and surrender of their rights to take legal resource on disputes with the government
or its technical advisor DGH.
Currently, Cairn India does not pay any royalty on the crude and has even contested
the payment of Rs 2,500 per ton cess on its 70% share in Rajasthan block.
Some of the key pre-conditions are as follows:
n Royalty costs recoverable. It means royalty costs should be recovered from the
sale of crude oil from the field before profit is shared between the companies
and the government. ONGC's royalty obligation is in excess to USD$3 Bn
(Rs.14500 Cr) for the approved crude oil production for the life-time of the field.
n Withdraw arbitration proceedings for Cess: ONGC also wants Cairn to withdraw
arbitration proceedings challenging its liability to pay cess for oil produced
from the Rajasthan block. The Company is currently paying under protest its
share of cess at Rs.2500/Ton.
n Guarantees to be provided: Vedanta will have to give financial and performance
guarantee same as given by Cairn Energy.
n Retain Technical capabilities: Vedanta has to retain the Cairn India's existing
technical capability.
n Adhere to the approved field development plans: Vedanta has to adhere to
the approved field development plans and work programmes of the oil and gas
fields as per contracts.
We believe if Cairn India accepts the first two conditions (though looks very unlikely)
then the valuations will be very expensive for Vedanta and will not make commercial
sense for it to acquire stake in it. ONGC's contention is that its returns from its
investment in the field should at least be higher than the cost of capital which is
about 13-14%.
As per Sebi regulation, an open offer requires 55-60 days to complete. The shareholders
approval taken by Cairn and Vedanta is valid up to 15th April'11.
Price target maintained to Rs.378
We have valued CAIRN India on DCF method of valuation with 12.04% WACC.
With the rise in the international crude oil price, the realization for the Company is
also expected to improve. However, the stock price has under-performed in spite of
improving fundamentals mainly due to uncertainty over the Cairn-Vedanta deal and
also on the royalty and cess payment. We expect that in the next three months, final
outcome of the deal should be declared. Based on the current valuations the stock is
available very cheap and we recommend a BUY with a target of Rs.378/share.
Based on the Rajasthan exploratory portfolio upsides and advancing production from
the MBA block our fair value for the stock is Rs.378/share. In our DCF model, we
have assumed a long-term static average crude oil price of US$86/bbls; Cairn crude
oil realization @ 10% discount; Cess at Rs.2575/MT; plateau production at
240kbopd.
Key Concerns
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact our valuations.
n Further delay from the government on the approval of the Cairn-Vedanta deal
can keep the valuations suppressed.
n If Cairn India accepts the above mentioned conditions related to royalty and cess
payment then it will have significant impact on our valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CAIRN INDIA LTD. (CIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.378
FY12E P/E: 6.3X
q Cairn India has reported good set of Q3FY11 results which are in line
with our estimates on the profitability front. We had estimated a PAT of
Rs.20.17 Bn against which the Company has declared a PAT of Rs.20.10
Bn.
q Recently, ONGC has said that its consent is not required for the deal and
it will count on the oil ministry to ease its royalty burden.
q Q3FY11 was the first full year of Mangala approved plateau production
at 125 kbopd (55 wells are producing).
q CIL has sold more than 100 kbopd (Net working Interest) in Q3FY11
q In H2 CY11, the Mangala processing terminal nameplate capacity is expected
to be 205 kbopd.
q Cash (Net debt) as on 31st Dec'10 was Rs.8.7 Bn. The Company replaced
its rupee facility of Rs.40 Bn with a lower financing of Rs.22.5 Bn.
q We maintain our FY11E EPS of Rs.33.9 and FY12E EPS of Rs.49.9.
q Stock is cheaply valued at 4.89x EV/EBIDTA and 6.3x P/E based on FY12
earnings estimates
q The Brent crude oil price is trading around USD$100/bbls which is the
benchmark for Cairn's crude oil. With the rise in the international crude
oil price, the realization for the Company is also expected to improve.
However, the stock price had under-performed in spite of improving fundamentals
mainly due to the uncertainty over the Cairn-Vedanta deal
(royalty and cess payment). We expect that in the next three months, final
outcome of the deal should be declared.
q Based on the current valuations the stock is available very cheap and we
maintain our BUY on Cairn India with a price target of Rs.378/Share.
3QFY11 net profit in-line with our estimate
n Cairn India's revenues for Q3FY11 has increased 525% YoY and 15% QoQ basis
to Rs. 30.9 Bn while PAT has increased 591% YoY and 27% QoQ basis to
Rs.20.1 Bn in Q3FY11. EPS was Rs.10.6 for Q3FY11.
n Cash flow from operations had increased by 30% QoQ basis to Rs.20.4 Bn in
Q3FY11
n For Q3FY11, the operational profit was up 738% YoY and up 21% on sequential
basis to Rs.25.4 bn. In Q3FY11, the operating margin had increased by 20.9%
YoY and 3.6% QoQ to 82.09% and PAT margin stood at 64.9% in Q3FY11
showing an improvement of 6.2% YoY and 5.9% QoQ. This was primarily due to
better realizations and economies of scale. This is well reflected by lower operating
expenses to sales ratio. Operating expenses to sales ratio had declined to
14.8% in Q3FY11 as against 27.1% in Q3FY10 and 15.8% in Q2FY11.
n PBT for Q3FY11 was at Rs.22.1 bn up 538% YoY and up 28% on sequential
basis.
Rajasthan production details
n In Q3FY11, the average gross production from Rajasthan block was 124.9 Kbopd
as compared to 15.43 kbopd in Q3 FY10 and 116 Kbopd in Q2FY11 registering a
growth of 709% YoY and 7.6% QoQ basis.
Latest developments on Cairn-Vedanta deal
The Oil Ministry has imposed 11 pre-conditions on Cairn India and its prospective
buyer Vedanta Resources, for approving the deal. ONGC and Vedanta have shown
willingness to accept most of the conditions except the change in royalty obligations
and surrender of their rights to take legal resource on disputes with the government
or its technical advisor DGH.
Currently, Cairn India does not pay any royalty on the crude and has even contested
the payment of Rs 2,500 per ton cess on its 70% share in Rajasthan block.
Some of the key pre-conditions are as follows:
n Royalty costs recoverable. It means royalty costs should be recovered from the
sale of crude oil from the field before profit is shared between the companies
and the government. ONGC's royalty obligation is in excess to USD$3 Bn
(Rs.14500 Cr) for the approved crude oil production for the life-time of the field.
n Withdraw arbitration proceedings for Cess: ONGC also wants Cairn to withdraw
arbitration proceedings challenging its liability to pay cess for oil produced
from the Rajasthan block. The Company is currently paying under protest its
share of cess at Rs.2500/Ton.
n Guarantees to be provided: Vedanta will have to give financial and performance
guarantee same as given by Cairn Energy.
n Retain Technical capabilities: Vedanta has to retain the Cairn India's existing
technical capability.
n Adhere to the approved field development plans: Vedanta has to adhere to
the approved field development plans and work programmes of the oil and gas
fields as per contracts.
We believe if Cairn India accepts the first two conditions (though looks very unlikely)
then the valuations will be very expensive for Vedanta and will not make commercial
sense for it to acquire stake in it. ONGC's contention is that its returns from its
investment in the field should at least be higher than the cost of capital which is
about 13-14%.
As per Sebi regulation, an open offer requires 55-60 days to complete. The shareholders
approval taken by Cairn and Vedanta is valid up to 15th April'11.
Price target maintained to Rs.378
We have valued CAIRN India on DCF method of valuation with 12.04% WACC.
With the rise in the international crude oil price, the realization for the Company is
also expected to improve. However, the stock price has under-performed in spite of
improving fundamentals mainly due to uncertainty over the Cairn-Vedanta deal and
also on the royalty and cess payment. We expect that in the next three months, final
outcome of the deal should be declared. Based on the current valuations the stock is
available very cheap and we recommend a BUY with a target of Rs.378/share.
Based on the Rajasthan exploratory portfolio upsides and advancing production from
the MBA block our fair value for the stock is Rs.378/share. In our DCF model, we
have assumed a long-term static average crude oil price of US$86/bbls; Cairn crude
oil realization @ 10% discount; Cess at Rs.2575/MT; plateau production at
240kbopd.
Key Concerns
n Delay in getting government approval for increasing the production from the
Rajasthan block can impact our valuations.
n Further delay from the government on the approval of the Cairn-Vedanta deal
can keep the valuations suppressed.
n If Cairn India accepts the above mentioned conditions related to royalty and cess
payment then it will have significant impact on our valuations.
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