Neutral on Cairn India - Motilal Oswal

Cairn India (CAIR IN; Mkt Cap USD13.1b, CMP Rs314, Neutral)

Cairn India reported Net sales stood at Rs31b (up 6x YoY and 15% QoQ) EBITDA of Rs25.6b for 3QFY11, up 7x YoY and 18% QoQ. Lower than estimated sales and EBITDA were due to lower Rajasthan crude price realization at ~US$75.9/bbl (v/s our estimate of US$77.9/bbl), impacted by higher discount to Brent crude price (at 13.5% v/s our estimate of 12.5%).

Rajasthan crude realization was US$75.9/bbl in 3QFY11 (v/s US$69.4/bbl in 2QFY11 and our estimate of US$77.9/bbl), indicating a ~13.5% discount to average Brent price of US$86/bbl. Increase in light-heavy crude price differentials adversely impacts the discount to Brent as witnessed in 3QFY11.

Management attributed the delay in GoI approval to the transaction size and complexity; Cairn India has received no written communication from GoI on deal preconditions. Management indicated that the Cairn India Board has decided not to accept any precondition that harms minority shareholders' interest.

We are cutting our production assumptions for 4QFY11/FY12/FY13 from 135/172/197kbpd to 125/160/195kbpd due to delay in approvals for ramp-up. Our FY11/FY12/FY13E EPS changes by 1%/-11%/-1% to Rs30.8/41.2/45.9. Cairn India trades at 7.6x FY12E EPS of Rs41.1. At oil price of US$90/bbl, Cairn's FY12 EPS would be higher by 17% at Rs48.2. Our SOTP-based target price for Cairn is Rs323 at long-term Brent price of US$75/bbl. At long-term Brent price of US$90/bbl, our SOTP value would increase to Rs372/share. Neutral.

Source : Equity Bulls

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