Monday, December 5, 2011

>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