Cairn India 01Apr13 New

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  • 3

    VIOLET ARCH Research

    Cairn India Ltd - Company Report

    VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)

    COMPANY REPORT

    Cairn India Ltd. Operation Desert Storm

    Equity Research l Oil & gas

    April 5, 2013

    We initiate coverage on Cairn India Ltd. (CIL) with a BUY rating. CIL is one of the best stock plays in India to have direct exposure to global crude prices. With its world-class Rajasthan Block already under production, the company has joined the big league of players in Indias E&P space. Rajasthan Blocks Gross Hydrocarbons Initially In Place (GHIIP) is 7.3bnboe, of which estimated recoverable reserves stand at 1.7bnboe. In two years production from Rajasthan Block is expected to reach 210,000bopd from the current 170,000bopd, which will contribute around 30% of Indias domestic crude production. With world-class oil production assets, exciting E&P prospects and highly competent management, coupled with high crude prices, CIL stock is an attractive investment option.

    Investment Argument Resource-rich Rajasthan fields CILs GHIIP in Rajasthan Block stands at 7.3bnboe, with the expected ultimate recovery of about 1.7bnboe. MBA (Mangala, Bhagyam and Aishwarya,) fields in Rajasthan Block have reserves of around 2.1bnboe, of which 2P reserves are estimated at 1.0bnboe, representing a recovery factor of 48%. Additionally, CIL has estimated recoverable resources of around 165mmboe from the Barmer Hill formation and other discoveries and another 530mmboe from the exploration upside. With the approval from government for resume exploration activities in Rajasthan block (after a gap of four years), Cairn has already embarked upon a 3-year exploration programme to drill over 100 exploratory/appraisal wells.

    Rajasthan Block production to rise by 22% by end of FY15 CIL is poised to achieve production of 210,000bopd from Rajasthan Block from the current 175,000bopd on the back of sustained production of 150,000bopd from Mangala along-with EOR (Enhanced Oil Recovery) implementation, ramp-up of Bhagyam to 40,000bopd and peak output of 20,000bopd from Aishwarya. A strong output ramp-up, along with high crude prices, will ensure healthy growth in cash-flows for the company.

    Valuation At the CMP of Rs 288, the stock trades at P/E, EV/EBITDA and P/BV of 5.5x, 2.7x and 0.8x, respectively, on FY14E estimates of EPS, EBITDA and BV. Since the production has begun from MBA fields, the stock has averaged at 7.8x one-year forward earnings. We value MBA fields on a NAV basis and other recoverable reserves on an EV/boe basis to arrive at a target price of Rs 374, which reflects an EV/boe of $9.5/bbl. We initiate coverage on Cairn India with a BUY rating.

    CIL valuation

    Block Net 2P/ Recoverable

    Reserves (mmbbl) Rs/share (USD/boe)

    MBA + EOR 620 206 12.9

    Barmer Hill 116 15 5.2 Exploration Upside Potential 371 49 5.2

    Ravva 14 3 9.1 Cambay 4 1 9.1

    Total 1,125 275 9.5 Net debt - 99 -

    Cairn India - 374 -

    Particulars FY12 FY13E FY14E FY15E

    Revenue (Rs bn) 118.6 176.0 170.4 164.7

    Growth (Y-o-Y) 15.4% 48.4% -3.2% -3.4%

    EBIDTA (Rs bn) 91.5 131.8 122.1 111.3

    EBIDTA margins 77.2% 62.5% 58.9% 55.5%

    PAT (Rs bn) 79.4 115.1 99.4 85.2

    PAT margins 66.9% 54.6% 47.9% 42.5%

    EPS 41.6 60.4 52.1 44.6

    P/E (x) 6.7 4.6 5.4 6.3

    EV/EBIDTA (x) 5.2 2.8 2.6 2.4 Source: Company, Violet Arch Research

    Stock data

    CMP Rs 288

    Reuters Code CAIL.BO

    Bloomberg Code CAIR IN

    Equity Shares o/s (mn) 1,908

    Market Cap (Rs mn) 534,160

    Market Cap (USD mn) 9,891

    Stock performance (%)

    52-week high / low Rs 366/283

    1M 3M 12M

    Absolute (10.6) (13.9) (20.2)

    Relative (8.1) (11.4) (28.0)

    Shareholding pattern (%)

    Relative stock movement

    Promoter, 59Public &

    others, 16

    FII, 15

    DII, 10

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    Cairn India Ltd Sensex

    Absolute Rating BUY Target Price Rs 374 Upside 30%

  • 4

    VIOLET ARCH Research

    Cairn India Ltd - Company Report

    VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)

    Scenario Analysis Particulars Bear Case Base Case Bull Case

    Peak Bhagyam rate (bopd) 30000 40000 50000

    Peak Bhagyam rate achieved in Q4FY14 Q4FY14 Q1FY15

    Peak Aishwarya rate (bopd) 10000 20000 20000

    Peak Aishwarya rate achieved in Q2FY14 Q2FY15 Q4FY14

    FY14 brent price (USD/bbl) 105 110 120

    FY15 brent price (USD/bbl) 95 100 110

    Long-term brent price 85 90 100

    Discount to Brent Crude 12% 12.0% 12%

    Exchange rate in FY14(Rs/$) 53 53 53

    Exchange rate in FY15 (Rs/$) 51 51 51

    LT Exchange rate (Rs/$) 49 49 49

    Cess (Rs/tonne) increases to Rs 6500/MT in FY15 Rs 6500/MT in FY18 Nil

    WACC 10.0% 10.0% 10.0%

    FY14 EPS 47.5 52.1 59.8

    Inc/dec from base case -8.7% 14.7%

    FY14 EBITDA (Rs bn) 110.8 122.1 140.5

    Inc/dec from base case -9.2% 15.1%

    DCF based target price 329 374 436

    Inc/dec from base case -12.1% 16.6%

    CMP 280 280 280

    Potential upside 17.4% 33.5% 55.7% Source: Violet Arch Research

    Key Assumptions

    Base case

    CILs management has guided an exit rate of 200,000bopd to 215,000bopd from Rajasthan

    block at the end of FY14, which will largely be coming from MBA fields. In our base case, we

    have taken a conservative stance and assumed an exit rate of 195,000bopd by end of FY14

    with Mangala, Bhagyam and Aishwarya producing 145,000bopd, 40,000bopd and

    10,000bopd respectively by the end of FY14. We assume a peak rate of 150,000bopd,

    40,000bopd and 20,000bopd for Mangala, Bhagyam and Aishwarya respectively.

    We assume Brent price to average $110/bbl in FY14 in the base case as the geo-political

    issues between Iran and US/Israel and continued tension in Middle-East will continue to

    put upward pressure on prices. However, we assume the price to trend lower in FY15 at

    $100/bbl and $90/bbl beyond that.

    Capex of USD 2.0bn over FY14 and FY15 with 60% to be spent on Rajasthan block (30% on

    exploration and 30% on development) and remaining 40% to be spent on other assets and

    new ventures.

    Direct field opex of $3.5/bbl and pipeline opex of $1.5/bbl.

    DDA expenses at $9/bbl.

    Royalty of 15.5% on revenues.

  • 5

    VIOLET ARCH Research

    Cairn India Ltd - Company Report

    VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)

    Cess is assumed at Rs 4500/tonne in the base case for five years through FY13-17 and then

    hiked by Rs 2000/tonne every five years.

    EOR in Mangala to be implemented in FY15.

    Field-life of MBA fields till FY41.

    Bear case

    In our bear case, we assume an exit rate of 185,000bopd by the end of FY14 with Mangala,

    Bhagyam and Aishwarya producing 145,000bopd, 30,000bopd and 10,000bopd respectively

    by end of FY14. However, we assume the peak rate of 30,000bopd for Bhagyam and

    10,000bopd for Aishwarya.

    We assume brent crude to be $105/bbl and $95/bbl in FY14 and FY15 respectively, while

    for long-term we assume price to be $85/bbl.

    Cess is assumed to increase to Rs 6500/tonne in FY15 and then increase by Rs 2000/MT

    every three years.

    Bull case

    In our bull case, we assume an exit rate of 215,000bopd by end of FY14 with Mangala,

    Bhagyam and Aishwarya producing 145,000bopd, 50,000bopd and 20,000bopd respectively

    by end of FY14. We assume peak rate of 50,000bopd and 20,000bopd for Bhagyam and

    Aishwarya respectively.

    We assume brent crude to be $120/bbl and $110/bbl in FY14 and FY15 respectively, while

    for long-term we assume price to be $100/bbl.

    Cess is assumed to remain constant at Rs 4500/tonne throughout the life of the field.

  • 6

    VIOLET ARCH Research

    Cairn India Ltd - Company Report

    VIOLET ARCH Securities Pvt. Ltd. (Erstwhile Alchemy Share & Stock Brokers Pvt. Ltd.)

    CILs production from various blocks

    Cairn has three producing assets namely, Rajasthan block, Ravva and Cambay. While Rajasthan

    block is on a ramp-up phase Ravva and Cambay being mature fields are on decline. Currently

    Rajasthan block is producing at the rate of 175,000 bopd and Ravva and Cambay at ~28,000

    boepd and ~6,000 boepd.

    Crude production (mmboe)* FY10 FY11 FY12 FY13E FY14E FY15E

    Rajasthan Block 3.80 25.80 32.82 43.25 47.78 52.93

    Growth Y-o-Y

    580% 27% 32% 10% 11%

    Ravva 3.34 3.03 2.99 2.68 2.41 2.17

    Growth Y-o-Y -38% -9% -2% -10% -10% -10%

    Cambay 1.97 1.63 1.20 0.96 0.77 0.61

    Growth Y-o-Y -21% -17% -26% -20% -20% -20%

    Total 9.11 30.47 37.02 46.89 50.96 55.72

    Growth Y-o-Y 16% 234% 21% 27% 9% 9% Source: Violet Arch Research;*Cairns stake in production

    Rajasthan Block

    Cairn began production from Mangala block in August 2009 and is currently producing at

    150,000 bopd. Bhagyam has started production in Jan 2012 and is currently producing at 20,000

    bopd while Aishwarya has commenced production recently.

    Production (mnbbls) FY10 FY11 FY12A FY13E FY14E FY15E