Cairn India - Update - Motilal Oswal

Production ramp-up on track to reach 240kbpd in 2013

Government approvals critical; scouting for acquisitions

- We met the management of Cairn India to get an update on its production ramp-up and cash deployment plans.

- The management indicated that the company is on track to ramp-up production from its Rajasthan fields to 240kbpd by 2013.

- Also, Cairn India is actively scouting for overseas acquisition targets. This gives some clarity on cash deployment.

Production to ramp up to 240kbpd in 2013

After reaching a producing rate of ~175kbpd (Mangala - 150kbpd, Bhagyam - 25kbpd) in April 2012 at its Rajasthan block, Cairn India is working towards pipeline debottlenecking, which will allow further ramp-up to 190-200kbpd by December 2012. Incremental volumes will come from production ramp-up at the Bhagyam and Aishwariya fields. Further, Cairn India maintains its target of production ramp-up to 240kbpd in 2013; however, it is subject to government approvals (current approval for 200kbpd).

Cash deployment - scouting for overseas acquisitions

Post the 20% dividend payout guidance and continued investment in Rajasthan block, Cairn India is actively scouting for suitable overseas acquisitions to deploy cash. With gross cash of ~USD1.7b and estimated free cash flow of ~USD3.5b over FY13-14, Cairn India will have post-dividend cash of ~USD4.2b at its disposal for acquisitions. Its strategy is to limit its exposure to 2-3 regions and it is looking to add some exploratory assets to its portfolio. It has already studied >50 potential acquisition assets.

Hopeful of early government approvals; plans appraisal drilling in KG onshore/Sri Lanka

Cairn India is hopeful of early government approvals for: (1) Subsidiary restructuring - will enable it to pay its maiden dividend, and (2) Further exploration in Rajasthan - will help to increase reserves and reach target production of 300kbpd. The management mentioned that pilot enhanced oil recovery (EOR) with application of polymer injection has given encouraging results and it will soon file its EOR field development plan (FDP). The company plans appraisal drilling in KG onshore and Sri Lanka in the next 12 months.

Valuation and view

We currently model production from the Rajasthan block at 184/223/245kbpd; Brent oil price at USD105/100/90 per bbl and INR/USD at 52.5/48/47 for FY13/FY14/long-term. Our SOTP-based target price stands at INR358, implying 14% upside. Maintain Neutral.

Source : Equity Bulls

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