Thursday, January 5, 2012

>CAIRN INDIA: To benefit from weak INR and high oil prices (IFIN RESEARCH)

■ Weak INR to boost earnings; upgrade to Buy
Expect 17% FY11-FY13 EPS CAGR on weak INR, high oil price
We expect Cairn India to benefit from weak INR and high oil prices. To reflect this, we revise upward our Rs/USD exchange rate assumptions for FY12 to Rs49 (Rs45 earlier) and for FY13 to Rs52 (Rs45 earlier) and crude price assumption to USD110/bbl for FY12 (USD105/bbl earlier) and USD100/bbl for FY13 (USD95/bbl earlier). Consequently, we revise upward our EPS estimate for Cairn India by 10% to Rs40.3 for FY12 and by 24% to Rs45.6 for FY13. We expect Cairn India’s EPS to grow at 17% CAGR over FY11-FY13, the highest in our Oil & Gas coverage universe.

■ Production ramp-up in sight, 36% volume CAGR in FY11-13
With the completion of Cairn-Vedanta deal, we now expect regulatory approvals to come soon, which would help Cairn India to ramp-up production at its Rajasthan block. The Cairn India management has guided for ramp-up in crude oil production to 175kbpd by Mar-12 (subject to GoI approvals) versus 125kbpd currently led by start-up of crude production at Bhagyam field (expected peak production rate of 40kbpd) and ramp-up of crude production at Mangala). We model crude oil production volume CAGR of 36% over FY11-FY13E.

We have upgraded the stock to Buy from Hold with a revised target price of Rs364 (Rs321 earlier) on back of our weak INR assumption. We assume long term crude price of USD95/bbl and Rs/USD exchange rate of Rs50 FY14 onwards. The stock factors in long-term crude price of USD71/bbl and appears attractive at P/E of 6.7x FY13E EPS and 4x EV/EBITDA. Key risks to our target price and rating stems from steep fall in crude oil price.