Cairn India (CAIR IN, INR 309, Buy) - Edelweiss

Cairn India's (Cairn) Q1FY14 revenue at INR40.6bn was in line with our estimate. Gross Rajasthan oil production was 172.8kbpd, up 3% QoQ, and importantly, current production is 180kbpd. Cambay production almost doubled QoQ. Despite this, higher government profit share in Rajasthan's Development Area 1 led to in line revenue. On higher forex gain (INR6.8bn) and lower tax rate (1.9%), PAT at INR31.2bn surpassed our INR28.7bn estimate. Cairn has maintained its guidance for Rajasthan production at 200-215kbpd by March 2014. While we maintain our average production at 181/200kbpd in FY14/15E, upsides are possible. Cairn is trading at 2.8x EV/EBITDAX with current price ignoring exploration upside. Maintain 'BUY' and revise target price to INR382 (INR363 earlier) due to INR depreciation.

Current Rajasthan oil production at 180kbpd

Gross production across blocks was 212kboepd (up 5% QoQ) with gross Rajasthan oil production at 172.8kbpd (up 3% QoQ). While Rajasthan oil realisation was USD94.3/bbl (8% discount to Brent), opex at USD3/bbl was lower than the USD5/bbl guidance. Current Rajasthan production is 180kbpd. Cambay oil production rose 88% QoQ to 8.5kbpd following completion of infill drilling. Government share in Development Area 1 of Rajasthan (Mangala, Aishwarya) rose from 20% to 30%, leading to higher sharing of INR10.5bn. Ergo, despite higher production, revenue was in line.

Year-end Rajasthan target of 200-215kbpd maintained

Cairn has received MC approval for Mangala infill drilling of 48 wells to maintain plateau. Production from Barmer Hill and two other satellites (NI/NE) is expected to commence in FY14, subject to approvals. It has drilled two exploration and one appraisal well so far and is now drilling fourth well. Number of rigs has increased from 2 to 4 (3 development, 1 exploration) and expected to have 10 rigs (6 development, 4 exploration) by FY14 end.

Outlook and valuation: Exploration upside not factored; 'BUY'

We raise our target price from INR363 to INR382 to adjust for a lower INR. While the key to Cairn's stock remains exploration success, we note that current price factors almost no exploration upsides (our estimate INR79/share). Valuations are also attractive at FY14E EV/EBITDA of 2.8x. Hence, we maintain 'BUY/Sector Outperformer'.

Source : Equity Bulls

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