Apply for Cairn India IPO: Prabhudas Lilladher

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Cairn India, a crude oil and natural gas exploration and production company, is open for subscription with a public issue of 32,87,99,675 equity shares of Rs 10 for cash at a premium to be decided through a 100% book-building process. Issue closes on December 15, 2006. The price band was fixed at Rs 160-190 per share.

DSP Merrill Lynch and ABN Amro Securities India are acting as global coordinators and book running lead managers to the issue along with book running lead manager JM Morgan Stanley.

The Prabhudas Lilladher report on Cairn India IPO:

A crude oil and natural gas E&P company, Cairn India is part of the re-organization of Cairn Energy's subsidiaries in India, owning and operating them. Cairn Energy plc has long and proven oil-and-gas-exploration expertise in India, having made 29 hydrocarbon discoveries since 1994 including the Ravva field. In 2004, it made the largest onshore crude oil discovery in India since 1985 when it discovered the Mangala field in Rajasthan (which makes up 90% of its reserves). Since then, Cairn has made 17 additional discoveries in the Rajasthan block and continues its exploration work. It has the second largest oil reserves in India.

In a pre-IPO private placement, Cairn India had placed about 11.88% (of the post-issue capital) or 209.7 million shares at Rs 176.5 each. In this pre-IPO placement, three companies are known to have acquired stakes; of these, Petronas (Petroleum Nasional Berhad) acquired a 10% stake. Cairn had received USD 822 million in this pre-flotation private placement. Of the proceeds of the IPO (USD 1,200 million), Cairn Energy plc will get USD 600 million and USD 600 million will be retained by Cairn India.

At the middle of the price band (Rs 160-190), the stock trades at an EV/Boe of USD 12.7, which seems to be on the higher side compared to the global peer USD 11.5 average. Moreover, it is almost at an 80% premium to ONGC's current EV/Boe of USD 6. However, ONGC's valuations are impacted by subsidies, lack of clarity regarding policies and no substantial recoveries over the past decade.

We believe that the management's successful track record on oil and gas discoveries might justify the premium for a long term investor. Moreover, the management believes that the producing life of the fields could be lengthened by another ten years using enhanced oil-recovery (EOR) technology, which would substantially enhance the NPV of current reserves. We advise a Subscribe on the IPO.

Investment Highlights

Since 1994 Cairn Energy has discovered 29 hydrocarbon deposits, proving its long-standing expertise in oil-and-gas exploration. In 2004, it made the largest on-shore crude oil discovery in India since 1985 when it discovered the Mangala field in Rajasthan. It has since made a further 17 discoveries in the block at Rajasthan. The gross 2P reserves in production (including those under development) are stated to be 754 mmboe. Cairn's interest in these blocks works out to 472 mmboe. In the Rajasthan block, gross 2P reserves are estimated at 632 mmboe; of these, Cairn's interest stands at 442 mmboe.

The Rajasthan crude is characterised by high viscosity and a propensity to solidify at certain temperatures. To render it viable, the company will be utilising technology unused extensively till now. Added to which, such crude is expected to sell at a 7-10% discount to Brent. Moreover, uncertainty continues over the marketability of the crude, as no long term contract has yet been signed with any downstream consumer. However, according to the production-sharing contract, PSC, Mangalore Refineries and Petrochemicals, MRPL is the assigned authority to lift the crude from Rajasthan.

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Investment highlights

Concerns