Cairn India Limited - Stepping up on growth pedal - Antique

Rajasthan production back on growth trajectory as Aishwarya ramps up

We understand from channel checks that Aishwarya field is currently producing close to 10Mbbl/d from just 6 wells helping Rajasthan output back on a growth trajectory. Current output is estimated at 178-180Mbbl/d, which is better than expected. Aishwarya is showing results similar to Mangala field (increased output from 125 to 150Mbbl/d), making a case for approving higher output of ~20Mbbl/d+ vs. 10Mbbl/d approved FDP rate. We expect CIL to report ~175Mbbl/d of average gross production from RJ block in 1QFY14e implying a 4% QoQ growth. Aishwarya ramp up improves confidence that consortium would be able to end FY14e with 200-215Mbbl/d output which is also reiterated by CIL in its recently published annual report. RJ output has largely remained flat at ~170Mbbl/d for the last 1 year and we believe returning to growth would be sentimentally positive.

Near term earnings to be driven by sharp rupee depreciation, FX gains

The recent sharp depreciation of the INR is positive for CIL due to dollar denominated earnings. For INR1/USD rupee depreciation, Cairn's EPS improves by INR1/sh and our target price goes up by INR5/sh. With crude prices hovering at USD100-105/bbl and rupee at INR58-60/USD, rupee realization of oil is at a high of INR5800/bbl+. We believe current stock price is not discounting the improvement in realizations. Further CIL has a cash balance of ~USD1bn in dollars out of total ~INR160bn cash and current investments. This would entail near term FX gains to the company.

Pipeline debottlenecking complete; Additional approval process for MBA, BH underway

CIL has completed the Drag Reducing Agents debottlenecking of Mangala-Salaya pipeline and has successfully tested the same thereby enhancing capacity to handle CIL's planned production ramp-up. Approval process for Mangala infill wells and Barmer Hill (incl. NI & NE) is underway. The infill wells and polymer EOR (in FY15) would extend Mangala's ~150Mbbl/d plateau while ~15-20Mbbl/d is expected from BH and Aishwarya ramp up subject to approvals. Bhagyam production would also be raised to approved 40Mbbl/d with further drilling. CIL aims sustenance of existing production at 200Mbbl/d+ through these measures while fresh exploration is targeted to test 50% of prospective 530Mmboe of risked resources in RJ which is crucial for an ultimate targeted output level of ~300Mbbl/d.

Reiterate BUY with INR351 target price

We reiterate our BUY rating on CIL with a DCF based target price of INR351/sh which implies 19% upside. We raise our FY14/15e EPS by 7/6% assuming a weaker exchange rate of INR54.5/53.5.

Source : Equity Bulls

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