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Cairn India Ltd.
Royalty Is the New Reality,
Focus on Production Growth
What's Changed
Price Target Rs429.00 to Rs359.00
EPS F2012E, F2013E -18.3%; -18.1%
We reiterate our OW but cut our target price and
earnings estimates due to the potential for an
unfavorable outcome on royalties. Cairn has
underperformed oil (Brent) by 60% since the
Cairn-Vedanta deal announcement, but we now
expect its correlation with oil prices to normalize.
We continue to like the stock for three key reasons:
1) strong production growth of 21% (CAGR) over
F2011-15, 2) strong FCF generation, and 3) valuations
look attractive, with the stock discounting an oil price of
US$74/bbl and trading at a F12E P/E of 6.4x, one of the
cheapest among global peers.
Simple majority of shareholders required for
acceptance of royalty: Post the government’s recent
notification to Cairn India about the preconditions related to
approval of Cairn-Vedanta deal, Cairn’s board has decided
to hold a postal ballot of all shareholders to decide on the
acceptance of these conditions. The most important
precondition is to make royalty cost recoverable. We note
that Cairn-Vedanta together now hold 80.6% of voting
rights.
Not all the preconditions are negative: A noteworthy
condition is that Vedanta Group has to guarantee that
the technical capabilities of Cairn India will be kept
undisturbed, which we believe bodes well for the
company’s production ramp-up plans.
Investors should now focus on production growth:
Cairn has highlighted that although, operationally, it
remains on track on its production-ramp plans, regulatory
and JV partner approvals have been slower in recent
months. But, assuming the royalty issue is likely to go in
the government’s favor, we expect the pace of regulatory
approvals to pick up again, paving the way for strong
production growth of 21% (CAGR) over F2011-15.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd.
Royalty Is the New Reality,
Focus on Production Growth
What's Changed
Price Target Rs429.00 to Rs359.00
EPS F2012E, F2013E -18.3%; -18.1%
We reiterate our OW but cut our target price and
earnings estimates due to the potential for an
unfavorable outcome on royalties. Cairn has
underperformed oil (Brent) by 60% since the
Cairn-Vedanta deal announcement, but we now
expect its correlation with oil prices to normalize.
We continue to like the stock for three key reasons:
1) strong production growth of 21% (CAGR) over
F2011-15, 2) strong FCF generation, and 3) valuations
look attractive, with the stock discounting an oil price of
US$74/bbl and trading at a F12E P/E of 6.4x, one of the
cheapest among global peers.
Simple majority of shareholders required for
acceptance of royalty: Post the government’s recent
notification to Cairn India about the preconditions related to
approval of Cairn-Vedanta deal, Cairn’s board has decided
to hold a postal ballot of all shareholders to decide on the
acceptance of these conditions. The most important
precondition is to make royalty cost recoverable. We note
that Cairn-Vedanta together now hold 80.6% of voting
rights.
Not all the preconditions are negative: A noteworthy
condition is that Vedanta Group has to guarantee that
the technical capabilities of Cairn India will be kept
undisturbed, which we believe bodes well for the
company’s production ramp-up plans.
Investors should now focus on production growth:
Cairn has highlighted that although, operationally, it
remains on track on its production-ramp plans, regulatory
and JV partner approvals have been slower in recent
months. But, assuming the royalty issue is likely to go in
the government’s favor, we expect the pace of regulatory
approvals to pick up again, paving the way for strong
production growth of 21% (CAGR) over F2011-15.
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