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Friday, April 13, 2012


Scrip Code: 532792 CAIRN
CMP:  Rs. 339.15; Buy at current levels.
Short term Target: Rs. 370, 6 month Target – Rs. 415; 
STOP LOSS – Rs. 312.00; Market Cap: Rs. 64,539.18 cr; 52 Week High/Low: Rs. 401.10 / Rs. 249.30
Total Shares: 190,29,68,633 shares; Promoters : 112,27,13,999 shares –59.00 %; Total Public holding : 78,02,54,634 shares – 41.00 %; Book Value: Rs. 167.12; Face Value: Rs. 10.00; EPS: Rs. 0.11; Div: 30.00 % ; P/E: 00.00 times; Ind. P/E: 11.77; EV/EBITDA: 00.00.
Total Debt: 1,350.00 Cr; Enterprise Value: Rs. 67,730.45 Cr.

CAIRN INDIA LTD: CAIRN INDIA LTD was incorporated in 2006 and is based in Gurgaon, India. The company was former subsidiary of Cairn UK Holdings Limited. Cairn India is an exploration and production company, a leading player in the oil and gas industry in India. Cairn India has been focusing on south Asia, especially India where it has interests in 15 blocks. The firm made more than 30 oil and gas discoveries in India and was listed in January 2007 through an IPO after it spun off from its parent Cairn Energy Plc. Vedanta Resources Plc along with its subsidiary SESAGOA acquired the controlling stake of 51 % at $8.6 billion in Cairn India at Rs.405/sh. SESAGOA brought in $3 billion for 20 % and the rest 31 % was by Vedanta. Cairn holds interest in 9 oil and gas block/fields located in the Baremer basin, the Mumbai offshore basin, the Kerala – Konkan basin, the Palar-Pennar basin, and the Cambay basin in India, as well as 1 block in the Mannar basin off the coast of northwestern Sri Lanka.The company also operates a pipeline and storage terminal. Cairn has working interest in 14 Exploration & Production blocks in Ravva and Cambay blocks which produces 51.4k boepd (Cairn WI 14k bpd). Cairn India sells its oil to refineries; and gas to public sector undertakings and private buyers. Cairn has commissioned three trains at MPT and pipeline section from MPT to Salaya, through which it is delivering crude to refiners. Government of India had granted Cairn India some oil & gas fields through Production Sharing Contract. The company had interest in oil & gas blocks/fields which include PR-OSN-2004/1, KG-ONN-2003/1, KG-OSNsn-2009/3 & MB-DWN-2009/1. CAIRN INDIA is compared with Oil India ltd and ONGC locally and with Japan Petroleum Exploration Company Ltd internationally. 

Investment Rationale:
In Jan'12, Cairn has commenced production from the Bhagyam oilfield in Rajasthan on approval granted by GOI. The benefit of the same will be reflected in Q4FY12. Further, Cairn expects to ramp-up the crude oil production from Bhagyam field to approved plateau rate of 40 Kbopd. According to the Company's management Mangala field, the biggest of the 18 discoveries in Rajasthan block, can produce 150 kbopd as against 125 Kbopd. Bhagyam, the second biggest field in the Rajasthan block, can produce 60 Kbopd as opposed to current approved peak output of 40 Kbopd (50 %), while Aishwariya oilfield can contribute 25 Kbopd as compared to earlier 10 Kbopd (150 %) and other fields can produce 65 Kbopd, subject to required approvals. As on 31st Dec'11, gross cumulative Rajasthan development capital expenditure was at US$ 3,323 Mn. Management has stated that further investments are planned to augment processing capacity and pipeline infrastructure. Recently, Mr. Jaipal Reddy (India's oil minister) has suggested that he will take actions to boost investment and raise oil & gas production. It is believed that this will speed up the process of approvals for production ramp up from Rajasthan fields, this should be significantly positive for Cairn India. Also, India has cut down its crude oil sourcing from Iran. This also demands for higher domestic oil production along with other diversified sources. Cairn's higher crude oil production at elevated international crude oil price along with weakening rupee will partly mitigate the negative impact of increased oil cess announced in the 2012-13 budgets. Cairn India has approached the petroleum minister, seeking support in making a case for a rollback of cess hike to the finance ministry, as per media reports. Any immediate rollback of cess looks unlikely. Also, the recent correction in the stock price discounts most of the negatives. In FY13, it is expected that refineries like RIL, Essar Oil and IOC will increase their crude oil off take from Cairn India (Rajasthan oil fields). With the commissioning of Essar Oil's expanded capacity the demand of Cairn's crude oil will increase. Further, Cairn has been pursuing with the Directorate- General of Foreign Trade (DGFT) for permission to sell crude oil to RIL's second 29-mt refinery at Jamnagar, which is a SEZ refinery. Cairn India’s dividend policy announcement will be a key trigger & will abate concerns regarding the utilization of cash. The Company's management has indicated to announce a sound dividend policy, they may announce special dividend in the coming result declaration. It is also believed that there is a possibility of upward revision in the company's Rajasthan crude oil reserves potential which the market has not discounted yet. Further, any significant reserves declaration from Sri Lankan block can add major value to the Company. Currently, the block is in E&D phase so the same is yet not been priced in. However, experts are bullish on the growth prospects of Sri Lankan block.

Outlook and Valuation:
The recent correction in stock price of Cairn India is mainly due to hike in cess rate by GOI and this will impact earnings. However, Cairn's higher crude oil production from Rajasthan block at elevated international crude oil price along with weakening rupee will partly mitigate the negative impact of increased oil cess. The Company has approached the petroleum minister, seeking support in making a case for a rollback of cess hike & any immediate rollback of cess looks unlikely. In the Union Budget 2012-13, GOI increased the cess on crude oil production to Rs. 4,500/mt from Rs. 2,500/mt earlier. The earlier revision in cess happened during the Budget 2006-07. This increase in cess is attributed to indexation by the government. Although, cess is cost recoverable while calculating the profit petroleum for the upstream companies, the absolute impact in earnings would be still substantial. CAIRN INDIA has announced its production figures for the JAN - MAR quarter, the average daily gross operated production was of 1,80,293 Barrels of Oil Equivalent (BOE) for the quater, with working interest production at 1,07,292 Barrels of Oil Equivalent Per Day (BOEPD). Cairn India announced an oil discovery in the Nagyalanka - SE-1 well, which is is the second discovery in the onshore KG-ONN-2003/1 block in the Krishna - Godavari basin. Testing is underway and the discovery will be appraised further for establishing commerciality. At the current market price of Rs. 339.15, the stock is fairly valued at 5.3 x EV/EBIDTA and trading at a PE of 6.00 x FY13E. The company can post Earnings per share (EPS) of Rs. 44.40 in FY12E and Rs. 56.70 in FY13E. One can buy CAIRN INDIA Ltd with a target price of Rs. 370.00 for Medium to Long term investment. CAIRN INDIA to declare its results on April 20th 2012.

SOTP valuation (FY2013E)
BUSINESS SUBSIDIARY (FY13E) Value per Share (Rs.)
MBA (DCF) 286.00
Ravva and Cambay basin (EV/BOE 11x) 9.00
Barmer Hills (EV/BOE 8x - 50% disc. to MBA) 11.00
Other exploratory (EV/BOE 4x-75% disc. to MBA) 36.00
TOTAL EV 342.00
NET DEBT(25.00)
EQUITY VALUE (Rs.) 367.00

SALES (Rs. Crs) 10,277.90 13,013.50 16,429.90 16,399.90
NET PROFIT (Rs. Crs) 6,334.40 8,693.50 11,095.20 9,415.70
EPS (Rs.) 32.40 44.40 56.70 48.10
PE (x) 10.90 7.90 6.20 7.30
P/BV (x) 1.70 1.50 1.20 1.20
EV/EBITDA (x) 8.00 5.50 3.80 3.90
ROE (%) 17.10 19.80 21.20 16.50
ROCE (%) 16.30 19.10 20.50 16.20

I would buy CAIRN INDIA Ltd with a price target of Rs. 370 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 312.00 on every purchase.


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