Accumulate Cairn India - CMP: Rs.298, TP: Rs.401 - Prabhudas Lilladher

Exploratory approvals to provide a fillip to production: 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 had expired in 2005, street was not according value to the exploratory upsides. Now that the government has granted go-ahead on the exploratory front, management is expecting to spend ~US$1.2bn in Rajasthan and drill ~100 prospects in the next three years. This would help CIL achieve their guided production exit rate of 200-215 kbpd at the end of FY14 and help assuage production growth concerns stemming from delay in ramp-up at Bhagyam field. However, a delay in getting the regulatory approval for Mangala EOR could lead to a temporary decline at Mangala, denting production growth in the near term. 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 (~20% 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. Pending clarity on ring fencing, 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.

Hedge against rupee and inflation: 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. On the other hand, Cairn India also tends to be best placed in a inflation scenario arising out of rising crude oil prices. We estimate crude oil prices to average at US$105/bbls for FY14, with OPEC playing the balancing act in case of demand decline.

Source : Equity Bulls

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