Reduce Cairn India - Elara Capital

• Cairn India
• Rating : Reduce
• Target Price : INR315
• Downside : 5%
• CMP : INR332 (as on 27 July 2010)

Dull quarter, but progress continues

Lower crude sales drives Q1 miss, operational progress on track

Cairn reported its Q1FY11 results with revenue coming in at INR8.4bn vs our est. of INR10.7bn and Street's INR11.5bn. Though, the gross Q1 production of 4mnbbls was exactly in-line with our est., the company recorded lower sales of only 2.7mnbbls. Of the remaining 1.3mnbbls, the recently commissioned pipeline has an inventory of 1.1mnbbls while 0.2mnbbls were stock inventory. Both the Street and we had factored in sales of ~2.7mnbbls for Cairn, while Cairn's reported working interest came at ~74% of the gross sales of 2.7mnbbls. Moreover, Cairn also surprised with higher DDA costs driven by higher depreciation for the new pipeline. Also, the Q1 opex was USD4.3/bbl, higher than the company guidance of USD3.5/bbl. However, as guided by the management in Q4FY10, the company reiterated that the opex is expected to be ~USD3.5/bbl once the production reaches a steady state rate of 175kbpd. In terms of production, the ramp-up is on track and we expect the Mangala to reach 125kbpd by H2CY10.

Downgrade to REDUCE on valuations; Maintain TP of INR315

Based on our estimates, Cairn's stock is currently factoring in USD80/bbl of crude price for its MBA valuation and a reasonable upside from other Rajasthan prospects. Factoring in Mangala peak production at 150kbpd instead of the earlier guidance of 125kbpd, still our TP comes to ~INR340/sh, only 2% upside from current levels.

We remain bullish Cairn's long-term reserve accretion prospects, especially through the other fields in Rajasthan and recommend investors with a 2-3 year time horizon to stay invested. However, we do not believe that any further upside from these reserves will get built in the stock in the next 2-3 quarters. As a result, we are downgrading our rating for Cairn from Buy to Reduce, while maintaining our target price at INR315/sh. Additionally, the crude demand-supply scenario does not indicate a strong rally in crude prices over the next 2-3 quarters, which would keep Cairn's shares range-bound. We would recommend investors to take fresh positions around INR275/sh levels, as we feel the risk-reward is much more favorable at those levels.

Source : Equity Bulls

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