>Cairn(ICICI Securities)

Cairn India’s Q3CY08 recurring net income was at Rs3.1bn (I-Sec: Rs1.6bn, Street:
Rs1.4bn) on the back of higher-than-expected other income from investments
(Rs1.2bn) and forex fluctuation gain of Rs873mn. The company’s production
declined 9% YoY to 17.1mboepd due to 22% YoY fall in Ravva crude production
(owing to natural decline in the field), though partially offset by 54% YoY rise in
Cambay crude production. The stock has corrected 44.6% and underperformed
the Sensex 16.2% in the past one month on the back of worries over global
recession, impact on crude demand and huge correction in commodity prices.
This is an excellent opportunity for long-term investors to buy the stock at cheap
valuations. The stock offers an attractive 42% upside to our bear-case valuation of
Rs163/share and 127% upside to our fair value of Rs261/share. Maintain BUY.

Net sales increased 20.6% YoY to Rs3.2bn on the back of 49.5% YoY rise in
average price realisation to US$87.3/boe. This was despite 9% YoY dip in net
production to 17.1mboepd in Q3CY08, primarily due to 22.5% YoY dip in Ravva oil
production.

EBITDA increased 33.1% YoY to Rs2.5bn due to higher sales and decline in staff
expenses that were partially offset by higher other administrative expenses. Staff
expenses fell 32.9% YoY to Rs160mn and operating expenses rose 268.8% YoY to
Rs172mn. EBITDA margin also improved 727bps YoY to 77.4%.

Recurring net incomes rose 150.9% YoY to Rs3.1bn due to higher EBITDA and
sharp 499.2% YoY rise in other income to Rs2.1bn on the back of higher income
from investments and forex fluctuation gain. DD&A rose 26.9% YoY to Rs650mn.

present, Cairn offers 42% upside to our bear-case valuations. Under bearcase
valuation of Rs163/share, we have assumed long-term crude price at US$60/bl,
cess liability for Rajasthan crude at Rs2,575/te, Rajasthan’s crude discount to Brent
at 15% and three months delay in commencement of production from Rajasthan to
January ’10.

Cheap valuations. Cairn is currently trading at long-term implied crude price of
US$35.4/bl. The stock offers an attractive 42% upside to our bear-case valuation of
Rs163/share and 127% upside to our fair value of Rs261/share. This is an attractive
entry point for long-term investors.

Read full report here Cairn(ICICI Securities)