Cairn India - Riding on hope - ICICI Securities

Cairn India (CIL) reported Q2FY13 revenues at Rs44bn (flat QoQ), marginally lower than expected. However, adjusting for forex loss of Rs7.8bn, profit at Rs30.4bn (flat QoQ) is in line with our estimates. Rajasthan crude realisation was lower, at ~US$97.6/bbl, due to higher discount to Brent (at 10.8%). Other income at Rs2.2 bn was higher as it includes Rs1.2 bn payment from ONGC for its 10% stake sale in KG 98/2 block. Operating costs (at US$2.75/bbl) and depreciation (at US$6.87/bbl) were lower than expectations. We continue to expect delays in ramp-up of oil production from Rajasthan to 240,000bpd (beyond 2013), as it requires three approvals.

Government approvals have been difficult to come by, especially if there are changes in the development plan. Further, Cairn India is still awaiting government approval for additional exploration in the block to harness resources indicated over the past two years. Approval for its corporate restructuring has come in, so the company can now announce a dividend (board meeting is scheduled for 31st Oct'12). We tweak our earnings and valuation estimates to capture three months' delay in production ramp-up.

We roll forward our valuations to FY14, thus increasing our target price to Rs354/share (from Rs334/share), capturing recoverable reserves of 1.4bn bbls (net). We believe the stock captures most of the positives from higher reserves and production. Maintain REDUCE.

Source : Equity Bulls

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