Accumulate Cairn India - Prabhudas Lilladher

Exploratory upsides yet to be priced in: Cairn upgraded its estimate of gross risked prospective resources to 530m boe from 250m boe in April 2012. However, as exploration period for the Rajasthan block expired in 2005, street has not accorded value to the exploratory upsides. Ranagarajan committee is expected to come out with their report on revised PSC and other sectoral issues (incl on exploration in a block post expiry of the exploration period) soon. We donRs.t see any reason why the extension in the exploration period will not be granted, and thus, we expect the news flows on exploratory upside to be positive, going ahead. It must be noted here that under the clause b (4) of the exploration policy, if the exploration period expires, there is a provision to carry out the work programme further. Some examples where extensions have been granted are GSPC Blocks, CB-ONN/2005/1 & CB/ON/2, Essar Block CB-ON/3 and HOEC Block CB-ON/7. We ascribe a value of Rs88/share (to 530m boe at 40% discount to 'MBA' implied EV/boe).

Strong business fundamentals: Strong production volumes growth (~40% over next two years) backed up by a strong reserve base (1.7bn boe) along with high FCF yields (~ 10% at current market price) makes Cairn India a strong fundamental investment idea. We believe, increased capex to increase production is likely to defer peak government profit share. Moreover, targeted production increase to 300kbpd is likely to provide further growth visibility over the current estimated peak output of 240kbpd, which might lead investors to value Cairn as a going concern entity.

Rupee hedge: With crude oil increasingly being treated as a financial asset, there is a strong negative correlation between dollar index and crude oil prices. At times of correction in crude, weakness in rupee is likely to support earnings. We estimate crude oil prices to average at US$105/bbls for FY13 and FY14, respectively, with OPEC playing the balancing act in case of demand declines.

Source : Equity Bulls

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