>Cairn India Limited (ANTIQUE)

Discovering value; Upgrade to Buy

Cairn India has corrected ~20% post its 1Q results, due to oil prices softening to USD85/bbl; USD1.3bn related party loans and advances; and concerns on production growth. The company has remained confident of achieving 7-10% production CAGR over FY14-17e from execution of Mangala, Bhagyam and Aishwariya enhanced oil recovery (EOR) and infrastructure projects (180-
200Mbbl/d); additional production from BH+satellite fields (10-30Mbbl/d); and development of gas potential (10-20Mboe/d). We estimate an 8% CAGR growth in Rajasthan output over FY14-17e to 230Mbbl/d (mid-range of the management's guidance) and Brent at USD95/bbl to arrive at our target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/boe. We upgrade the stock to Buy with a revised target price of INR315 per share.

Even in a worst case scenario, assuming long-term oil price at USD85/bbl and no production (190Mbbl/d) growth over the next three-years, we arrive at a DCF-based target of INR270 per share, at which it trades at an inexpensive valuation of 2.5x EV/EBITDA on FY16e EBITDA of INR101bn, with FY15-end cash balance of ~INR260bn, implying almost negligible downside from current levels.

► PAT at INR22.8bn slightly below estimate due to higher taxation
The company reported a 2QFY15 consolidated net profit of INR22.8bn, down 33% YoY, due to a 7% YoY decline in working interest production to 123Mbbl/d, on account of maintenance at the MBA terminal; 7% lower oil realisations; and 17% higher profit petroleum at INR15.4bn. Rajasthan output declined 7% QoQ to 163Mbbl/d in 2Q, led by planned maintenance shutdown at the Mangala Processing Terminal. Well interventions measures at Cambay have led to 23% YoY increase in production at CB-OS-2 field but remained flat QoQ. Average realisation was down 6% QoQ to USD91.3/bbl, while Rajasthan operating expenditure rose to USD6.3/bbl on account of maintenance.

► Significant progress in achieving 7-10% production CAGR
In Phase I, CIL has upgraded MBT fluid handling capacities, ahead of schedule, to ~800,000 barrels of fluid per day. It is also on-track for first injection of polymer in 4QFY15. Since all major equipment has been erected at the central polymer facility in MBA fields, the company is targeting 50% recovery, with a production potential of 180-200Mbbl/d. In BH+satellite fields, the company is leveraging technology and existing infrastructure to target 200-300MMboe, which is above our recoverable estimate of 165MMboe, with a production potential of 10-30Mbbl/d. It received operating committee approval to increase production at Aishwariya field up to 30Mbbl/d, while Bhagyam polymer flood EOR plan is being reviewed by its joint venture partner.

► Continued successful exploration, conservatively valued at INR28 per share
With resumption in exploration, CIL has struck 11 discoveries to establish 1.4bnboe of in place resources, out of 3bnboe exploration. While 0.6bnboe is under testing, the remaining 1bnboe is to be established during FY15/16. It has also identified 3bnboe of additional resources in Rajasthan, which raises the block's potential to ~10bnboe. While it is too preliminary at this juncture, we assume a 10% recovery, due to its tight nature (300Mmboe reserves), and USD3/boe valuation multiple estimate to arrive at a potential value of INR28 per share. The company has maintained its production and capex guidance, while final approval for nearterm triggers like Barmer Hill and Raageshwari gas development are awaited.

► Upgrade to Buy with a revised target price of INR315 per share
At long-term Brent of USD95/bbl and net recoverable resources of ~870MMbbl (MBA, BH+satellite fields), we arrive at our DCF-based target price of INR315 per share, which values exploration upsides conservatively at 10% of 3bnboe exploration potential and USD3/ boe. We upgrade the stock to Buy with a revised target price of INR315 per share.


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