Buy Cairn India for target price of Rs 315 - Elara Capital

• Rating : Buy
• Target Price : INR315
• Upside : 11%
• CMP : INR285 (as on 27 May 2010)

Dream to reality – Progress on track

High exploration costs drill through Q4FY10 results

Cairn India reported its Q4FY10 results with revenue of INR6.9bn against our estimate of INR6.4bn and Street's INR6.5bn. Both the Street and we were surprised by the lower-than-expected PAT of INR2.45bn; our estimate was INR3.06bn and Street was at INR3.50bn. The miss was primarily due to higher exploration costs as Cairn drilled more wells in Mangala for accessing the well-deliverability. Exploration costs in Q4FY10 were INR1,219mn vs our estimate of ~INR550mn, from INR440mn in Q3FY10. The operating cost for Q4FY10 was USD6/bbl, higher than the given guidance of USD3.5/bbl. However, according to Cairn, the operating cost is expected to be ~USD3.5/bbl once the production reaches a steady rate of 175kbpd.

Production ramp-up, pipeline, crude offtake deals on track

The Mangala field is current producing 60kbpd and we expect the field to ramp up to 125kbpd by H2CY10-end with Train 3 (50kbpd) getting operational by June-end. Pipeline construction from Mangala to Salaya (~590km) has been completed and will be operational soon. This should substantially reduce the transportation costs as the pipeline costs would be ~USD1.5/bbl compared to current trucking costs of~ USD8/bbl. The negotiations for crude offtake of 143kbpd have already been finalized with MRPL, IOC, Reliance and Essar Oil. Though the company has not disclosed the break-up of this 143kbpd, based on our channels checks, we believe that eventually Reliance and Essar would be lifting 60kbpd each due to (1) their higher complexity refineries which can easily process Cairn's heavy crude and (2) the proximity (4-10km) of their refineries from the Salaya delivery point.

Maintain Buy, TP of INR315/share, valuation bands to shift higher

We think Cairn's stock should continue to move in line with crude, however, progress in the production ramp-up, further operational efficiencies and reserve upgrades should lift the stock up in a higher valuation bands. We remain bullish on Cairn's reserve prospects, especially from other fields in the Rajasthan blocks where the in-place reserves are 1.9bnboe, and the recovery factor guidance has been only 8% so far. We maintain our Buy rating and TP of INR315/share.

Source : Equity Bulls

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