>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.


RISH TRADER

>BHEL: Recent coal sector reforms are extremely positive (ANTIQUE)

Coal reforms a key positive

The recent coal sector reforms are extremely positive for Bharat Heavy Electricals as it stands to significantly benefit from the government's decision to allocate coal mines to central and state power generators, on a nomination basis. We maintain our view that the Indian power generation equipment market is set for a rebound, on growing concerns of a power shortage in the country over the next
three-to-five years. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We reiterate our Buy rating.

■ BHEL is among the biggest beneficiaries of the ongoing reforms in the coal sector
In a key decision, the Union government recently decided to promulgate an ordinance to facilitate e-auction of coal blocks for private companies’ captive use and allot mines directly to state and central public sector undertakings. This comes in the backdrop of last month's Supreme Court order cancelling 214 coal blocks allocated to various companies since 1993. The process of auction is expected to be completed in the next three-to-four months. BHEL is the key beneficiary of these initiatives as 14 coal blocks, with 8.2bn tonne allocated to state and central PSUs, would be re-allocated and lead to higher capacity addition, with fresh equipment ordering for these capacities.

■ BHEL bagged two significant orders in the past two months
During the past few months, BHEL has bagged several orders. In the past two-months itself, the company bagged two significant orders, with an aggregate order value of INR113bn, to set-up power plants on an engineering, procurement, and construction (EPC) basis. It includes a major contract for setting up a 2X660MW supercritical thermal power plant worth INR78bn (8% of order book) at the Ennore special economic zone in Tamil Nadu from Tamil Nadu Generation and Distribution Corporation, at a healthy price of INR59m per MW, on an international competitive bid basis. BHEL also bagged an EPC order worth INR35bn from Gujarat State Electricity Corporation to set-up an 800MW power plant.

■ State electricity boards getting active to set-up capacities
Among other key developments, BHEL entered into a memorandum of understanding (MoU) with the Telangana State Power Generation Corporation to set-up 6,000MW power plants in the state. Many states are looking at aggressively building up power generation capacities, including Maharashtra, Andhra Pradesh, Telangana, and Rajasthan, which will significantly boost demand for power generation equipments over the next two-to-three years.

■ Power generation equipment market set to rebound over the next one-to-two years
We maintain our view that the Indian power generation equipment market is set for a rebound on growing concerns of a power shortage in the country over the next three-to-five years. We estimate that ~64GW (only coal) of power equipment orders will be placed during FY15-18e, predominantly by central and state sectors. In the next 12-15 months, we expect 18-20GW of orders to be placed. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We expect BHEL's order intake for FY15-17e to be an average INR521bn per year as against an average INR272bn per year during FY12-14. This will ensure a sharp pick-up in revenues from FY17 onwards. We expect BHEL's revenues to grow 6% and 17% over FY16e and FY17e, respectively.

■ Earnings to sharply rebound in FY17; Near-term earnings may be under pressure
Savings in material costs and better operating leverage will help improve EBITDA margin to 12.9% and 15.7% in FY16e and FY17e, respectively, from 11.6% in FY14. We see BHEL earnings bottoming out in FY15e (INR13.4, down 5% YoY; 48% of peak EPS of INR28.8 in FY12). We expect an earnings recovery from FY16e (17%) to spread into FY17e (41%). We maintain our Buy rating with a target price of INR315 per share (20x FY16e earnings).


RISH TRADER