Cairn India - Net production up 30% yoy, realisation down 5% yoy; maintain Add - BRICS

CAIR's net profit grew 3x yoy to Rs23.2bn in Q2FY13, but came in below our estimate of Rs31.8bn, due to a foreign exchange loss of Rs7.8bn. We are lowering our FY13 and FY14 volume estimates by 2% and 13% to factor in the delay in ramp-up in oil output from the Rajasthan block. With the increase in our FY13E oil price assumption to US$105/bbl (from US$93/bbl) as well as exchange rate assumption to Rs50/US$ (from Rs49/US$) from FY14 onwards and rollover to Q2FY14E estimates, our DCF-based target price is now up by 5% to Rs370/share. Maintain Add.

Net production up 30%, but realisation down 5%

CAIR's reported net profit of Rs23.2bn for Q2FY12 was below our estimate of Rs31.8bn, mainly due to a foreign exchange loss of Rs7.8bn on US$ deposits, which was not factored into our estimates. Net production rose 30% yoy to 129kbopd (production of the Rajasthan field was up 37%yoy to 120kbopd). However, oil price realisation declined 4.6% yoy to US$98.1/bbl (oil realisation of the Rajasthan field fell 5% to US$97.6/bbl), due to lower international oil prices and wider light heavy crude differential. The Rajasthan field's production currently stands at 175kbopd. Other income of Rs2.22bn included a one-time adjustment towards a 10% stake sale in KG-DWN-98/2 amounting to Rs1.17bn. Work on the Salaya-Bhogat section of the pipeline (80 km) has been initiated and is expected to be completed in H1CY13, while the marine facilities off the coast of Bhogat have been installed.

Bhagyam field ramp up delayed; lowering FY13E and FY14E volume estimate by 2% and 13%

Management has indicated that the ramp up of the Bhagyam field to increase its output from 25kbpd to 40kbpd will be delayed due to a bottleneck at the evacuation pipeline and insufficient development wells drilled. Technical/pilot trials for the application of Drag Reducing Agents (DRA) to de-bottleneck the pipeline have been completed and a report has been submitted to the management committee. The time required for receiving approval from the management committee and procuring the chemical will lead to a delay in ramp up of production. Management has emphasized that the resource base is sufficient to produce 40kbopd from the Bhagyam field. We are lowering our FY13 and FY14 volume forecasts by 2% and 13% to 175kbpd and 210kbpd respectively to account for the delay in ramp up of production and shutdowns required to tie-up new fields. We are also raising our assumption for crude oil realisation for FY13 to US$105/bbl (up from US$93/bbl) to factor in the higher oil prices in H1FY13 and increasing our exchange rate assumption to Rs50/US$ from FY14 onwards (up from Rs49/US$). As a result of the change in these assumptions, our FY13E EPS estimate is up by 16% to Rs49.6, while our FY14 EPS estimate is down by 7% to Rs47.4.

Raising target price to Rs370; Maintain Add

We maintain our view that CAIR is the best way to play the oil story in India, given its leverage to oil price, production growth exploration upside, and excellent management quality. With the change in our earnings assumption and rollover to our Q2FY14 estimates, our 12-month target price is now up by 5.4% to Rs370. CAIR's stock price discounts a long term oil price of US$79/bbl (vs. our long term assumption of US$90/bbl). The stock price is also at a discount of 9.4% to our base case NAV of Rs370/share. We, therefore, maintain our rating of Add on CAIR.

Source : Equity Bulls

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