>CAIRN INDIA LIMITED (GOLDMAN SACHS)

Ready for first oil; issues getting addressed; add to Conviction list

Source of opportunity
We add Cairn India to our regional Conviction Buy list based on the following factors: 1) the Rajasthan project is ready to start producing oil within next few weeks; 2) our concerns on the stock have materially reduced as the issues on oil pricing and off-take are getting addressed by the stake-holders; 3) our positive outlook on oil prices for 2H2009E and 2010E; 4) Cairn’s earnings leverage to oil prices and production growth profile being among the best in the peer group. Cairn India, in our view, is the best Indian stock for taking exposure to the improving fundamentals of
the oil market and is now our top pick in the Indian E&P space.

Catalyst
1) Removal of remaining uncertainty over pricing of Rajasthan oil before commencement of production in June 2009; 2) increase in oil prices through 2H2009E and 2010E; 3) completion of Cairn’s pipeline around Sep’09 and ramp-up of production volumes; 4) any success in Cairn’s exploration portfolio; 5) demonstration of EOR potential in Rajasthan.

Valuation
We reiterate Buy on Cairn India with new NAV-based 12-m TP of Rs290/sh (Rs240 earlier), implying potential upside of 25%. Currently, Cairn stock is implying long term Brent of US$60/bbl vs. our forecast of US$85/bbl from 2013E onwards. The stock is trading at 3.0x EV/DACF for FY12E (on full ramp-up), making it one of the least expensive E&P stocks globally. Based on global price trends, we believe there is limited risk of the price of Rajasthan oil being lower than our forecast of 15% discount to Brent. We updated Cairn’s earnings estimates following release of FY09 results and converted the financials and production profile to March fiscal. As a result our EPS estimates for FY10E-13E have changed by 3% to 174%.

Key risks
1) Delay in oil production, ramp-up, 2) adverse regulatory development.

To see full report: CAIRN INDIA