>CAIRN INDIA LIMITED: We believe new promoters will support Cairn India’s production growth endeavours

We expect regulatory approvals to be the next catalysts for the stock. Government of

India has in principle approved the Cairn/Vedanta deal after Cairn India agreed to share

royalty and cess on its production from Rajasthan fields; however, some routine approvals

are due. We expect these approvals by the end of the year, which should pave the way for

production growth from 125,000bopd currently. Furthermore, we believe the new

promoters namely Vedanta Group will support Cairn India’s ramp-up endeavours as they

have done with their previous acquisitions (details in the note).

The current environment of stronger oil prices, rupee depreciation and narrow heavylight

spread should benefit Cairn. Despite worries concerning global growth, crude oil has

remained around the current level of more than US100/bbl. Our analysis indicates that the

Brent oil price is unlikely to fall below USD90/bbl (refer to the note by our global oil team:

‘2009 all over again? We doubt it’ dated 11 August 2011). Also, rupee depreciation is likely to

benefit Cairn India, which sells crude oil in US dollar denomination. With the return of oil

production from Libya, the spread between heavy-light crude has fallen, which could also

moderately decrease the discount that the company offers on its Rajasthan crude. Our

valuations are for Brent of USD90/bbl, INR45/USD and an 11% discount to Brent against

current crude oil price of USD110/bbl and USD/INR of 52.

Rajasthan block, the main value driver has significant upside potential. Our detailed

analysis indicates substantial reserves upside in CIL’s Rajasthan block, which is currently

producing 125,000bopd. We believe the in-place oil volume can more than double with

the consequent increase in probability-weighted reserves by c40%. It is important to note

that the Rajasthan block constitutes c95% of our current valuation for CIL.

Valuation and risks. We reiterate OW on the stock with a target price of INR350. We

value Cairn India on DCF for production from known reserves, and a risk-weighted

multiple for reserves upsides. Lower crude oil price, rupee appreciation and slower pace

of production ramp-up are key risks to our rating.

To read the full report: CAIRN INDIA

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