Cairn India looks better alternative than ONGC: Karvy

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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 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 Karvy Stock Broking report on Cairn India IPO:

Investment Positives

A sizable play on crude oil in the Indian private sector

There are only a handful of listed companies available in India. While ONGC is a public sector company that gets much lower crude price realization due to the subsidy sharing formula, others like Videocon, Reliance are not pure crude oil exploration companies. Hindustan Oil Exploration is only into exploration, but its size is small. So, Cairn India has to be the first choice for investors wanting to invest in the Indian crude oil exploration story, as it would get market rate of price for its crude output.

Long and proven exploration expertise in India

Cairn India has a long and proven exploration expertise in India, having made 29 hydrocarbon discoveries since 1994. In 2004, it made the largest onshore crude oil discovery in India since 1985 when it discovered the Mangala field in Rajasthan. Since then, Cairn India has made 17 additional discoveries in the Rajasthan Block and continues to undertake exploration work which may lead to future discoveries and significant increase to crude output.

Crude oil price unlikely to fall below USD 50 per barrel

Global crude oil supply is dominated by Oil Producing and Exporting Countries (OPEC), which controls almost 40% of crude oil supply and potential reserves. As a result, they are in a good position to influence the crude oil price through supply management. Though we have seen the crude oil touching nearly USD 80 per barrel and currently quoting at USD 60, and our take is it is highly unlikely that it will go below USD 50. The crude oil price was moving in the range of USD 35-USD 40 in FY2004. So even if some inflation is taken into account, global crude oil companies will not settle for anything less than USD 50. In fact, OPEC has already announced an output cut of 1.2 million barrels per day as soon as the crude oil touched USD 60 and another output cut of 1.5 million barrels per day may be announced any time.

Tax holiday is an added attraction

The company has a seven-year tax holiday from corporate tax in respect of each eligible unit in the Rajasthan Block, commencing from the tax year during which commercial production begins.

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Concerns

Valuations