Emkay Global Financial Services is bullish on Cairn India
and has recommended buy rating on the stock with a target of Rs 397 in its April 1, 2013 research report.
Concern on production ramp-up largely overdone:
- “Recent correction in stock price provides a good entry point considering Cairn India’s strong fundamentals (i.e. strong production growth visibility and higher FCF generation) and attractive valuations
- Current valuations do not factor any potential upside to Rajasthan block from prospective resources
- Deployment of cash offers further upsides to valuation
- Post recent correction, CIL is among the cheapest E&P players compared to international peers. At CMP, stock trades at 6.5x FY14E and 1x P/BV. Maintain Buy with a TP of Rs.397
The stock price of Cairn India (CIL) has corrected 20 percent in last 3 months on the back of 1) production ramp-up concern from Bhagyam field and 2) recent concerns about a potential decline in crude oil production from Mangala field. We believe the concerns on production ramp up are over done and the current stock price does not factor in any potential upside to Rajasthan block reserves. We believe that ramp-up concerns will be short-term and with likely reserve accretion from exploration activity from other area, the risk-reward is favorable. However Cairn needs government approval to drill more than the approved number of wells in Bhagyam, as well as timely FDP approval for Barmer Hill to meet FY14 exit production guidance. We do not expect any change in the overall recoverable reserves based on near term ramp-up uncertainty and maintains our gross recovery estimate at 1.7bnboe. Exit production guidance for FY14 stand at 200-215kbpd at Rajasthan:
Management expects production to ramp-up from current ~170kbpd (Mangala: 150kbpd; Bhagyam: 20-25kbpd) to 200-215kbpd by the end of March 2014, on the back of production start from 1) Increase in production from Bhagyam 2) Production from Aishwariya (which started in March 2013), and (3) production from Barmer hill and satellite fields. Exploration from new area to support peak production rate of 300kbpd:
Cairn is starting an aggressive exploration program on Rajasthan block to unlock full potential of the block as the government has given exploration approval. This will help CIL to realize the estimated 0.53bnboe of risked recoverable prospective resource which amounts to about a third of the Estimated Ultimate Recovery potential in the Rajasthan block. For this the company plans to drill 100 exploratory wells over next three years, which would increase recoverable reserves and help it to reach long-term target of 300kbpd. Deployment of cash offers further upsides:
Considering the capex ( USD2bn over next two years) and dividend
pay out of 20 percent of the profit, we expect CIL will be able to generate strong free cash flow of Rs.138bn over FY13-15E. Thus we believe deployment of cash offers further upside to the valuations if company uses this cash for acquisition. Risk reward favorable;
Current valuations do not factor any potential upside to Rajasthan block from prospective resources, Maintain Buy: Currently the stock of Cairn India does not factor in any upside from Rajasthan block. Our fair value excluding upside from Rajasthan block stands at Rs310, which factors in recoverable reserves from only MBA fields of 1bnboe, including 300mnbbl of EOR (Enhanced Oil recovery) production. However we believe given the high potential of the block, we are likely to see positive outcome from the recent exploratory efforts undertaken by the company to explore prospective resources. Cairn trades at a P/E of 7.2x and EV/EBITDA of 2.7x on our FY15e earnings, implying 41.5 percent and 42.6 percent discounts to global peers. Recent correction in stock price on the back of production concerns provides an attractive entry point as we believe risk reward ratio is favorable at current levels. We maintain our Buy recommendation with the target price of Rs.397.
Public holding more than 90% in Indian cos
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