Cairn a direct beneficiary of high crude prices and weak rupee - IIFL

Cairn India is a pure play on crude oil prices with operating margins of 70-80% and net margins of 60%. Any rise in crude oil prices directly flows to the bottom line. Furthermore, a weak INR helps profitability as the refiners are billed in USD. For every, US$5/bbl rise in crude prices Cairn's EPS for FY14 will rise by 7%, while every Re1/US$ depreciation in INR EPS increases by 3%. With recent announcement on stimulus measures by major global economies, we expect crude to continue to trade at US$110/bbl levels.

Production ramp up - short term glitches... long term robust growth

Current production from the Cairn operated Rajasthan field is ~175kbpd, and with some delays in ramp up of Bhagyam field production the management has revised its FY14 guidance downwards to 200-215kbpd from the Rajasthan field. While 150kbpd will be from Mangala, 40kbpd will be from Bhagyam, 10,000kbpd from Aishwariya, incremental 15kbpd will be from the past discoveries for which Declaration of Commerciality has been filed. With GoI permitting exploration in the development area, the company has planned to drill 100 wells over the next three years. Going ahead, it plans to spend US$1.2bn as capex for the next two years in Rajasthan fields from which 50% will be exploration and appraisal activities while the rest 50% will be incurred on development. We remain confident of the quality of the basin and foresee robust growth in production in long term. The key to this growth would be a regime of smooth and consistent approvals of various projects.

One of the most attractively valued oil & gas stock in India With cash balance of Rs77bn at the end of FY12 and expected cash flow generation of Rs55bn in FY13 the balance sheet is going to remain healthy. Notably in FY14 the company will move in the higher tranche of profit petroleum wherein its sharing to government would increase to 30% from the current 20%. On valuations, Cairn India currently trades at a very attractive P/E of 5.9x on FY14E EPS of Rs50.7. This is based on a production estimate of 200,000bopd in FY14, crude oil realization of US$95/bbl (15% discount to Brent) and Rs/US$ estimate of 53.