Bullish on Cairn India, Petronet LNG: IIFL

Prayesh Jain, IIFL is bullish on Cairn India and Petronet LNG. "Cairn India, today, is trading at a multiple of close to around six-seven times FY14 earnings. That is pretty cheap," he adds.

He has a target price of Rs 187 on Petronet LNG. "We like it mainly on the theme that Liquefied Natural Gas (LNG) demand will remain strong," he asserts. Check out: Prabhudas Lilladher's stock bets for 2013 Below is the edited transcript of his interview on CNBC-TV18. Q: Your top pick is Cairn India. A couple of brokerages are bullish with target prices of around Rs 400. You have a target price of Rs 385. Why do you see further upside on Cairn, considering that there were issues regarding possibly lower production January onwards? A: Cairn India, today, is trading at a multiple of close to around six-seven times FY14 earnings. That is pretty cheap. These estimates factor in an average crude price of around USD 100 per barrel for Cairn India realisation. Considering the lower production, we were not too bullish on FY14 volume numbers. Going down the road, we believe that Cairn India has much more potential than the current production at the Rajasthan field. Media reports have suggested that they have got further approvals for more exploration in Rajasthan block. That paves way for longer term production growth in the Mangala, Bhagyam and Aishwariya (MBA) fields. This is a perfect proxy play on crude price. We are bullish on crude oil prices. We see an upside bias for crude oil prices. It is the best proxy play in the Indian market for playing that theme. Hence, we like Cairn India. Q: Report about the recommendations of the Rangarajan Committee suggests that we will eventually get into a situation where gas price would be revised regularly, maybe quarterly or half yearly though they suggest monthly. There is some bit of a relief in terms of the CAG’s audit. These are all just recommendations yet and it may require some courage for government in its final year to implement all of this. But even some of these are implemented, isn’t it a relief for Reliance? What is your view on the stock itself? A: Definitely. These would be a relief, if any of these are implemented. But we have seen in the past, many committees formed various oil and gas issues, but the kind of implementations, which we have seen, are very difficult to go by. We have a market performer rating on Reliance as of now. The two major businesses, contributing to the profit— refining and petrochemicals, are seeing headwinds in terms of margins. Refining, we do not see a very strong outlook from the current levels. We do not see gross refining margins (GRM) falling, but they would not have material upside from current levels as well. In terms of petrochemicals, we see downside pressures, given the fact that the low cost cash based capacities are expected to come up in Middle East and China itself is increasing its capacities. The demand outlook is not very strong. Both these segments, which contribute majorly to profits of Reliance today, are seeing pressures. We don’t have a very strong earnings outlook for FY14. But it the committee suggestions are gone ahead with and there are some more approvals, which the company is looking for, FY15 could be a much better year for Reliance, if things go by as per the recommendations. _PAGEBREAK_ Q: In the case that these Rangarajan committee report recommendations become a reality one day, how exactly would it affect GAIL, would it be negative? A: GAIL will not be impacted materially because there are two points. GAIL is in trading business. So, if the Rangarajan committee suggests a higher price, it will gain because marketing margins possibly could inch up slightly. Secondly, the transmission business will not get impacted. Possibly you might see higher gas production; gas transmission volume actually going up. So, GAIL might eventually benefit out of these recommendations. Q: The other one, which is not in your buy list, is BPCL. BPCL was getting somewhat positive comment from analyst because of its stake in the Mozambique block. With people now beginning to scale down those potential benefits because of the tax emanating from the Mozambique government, is that the reason why BPCL is not on your buy list or is it that losses from under recoveries are eating away any potential gains? A: BPCL has always been our preferred pick in oil marketing company (OMC), but the space itself is something that does not attract us, given the fact that there is a lot of uncertainty over the subsidiary sharing pattern. Definitely, BPCL relatively is a better stock to own rather than HPCL or IOC because of the E&P exposure it has. The substantial value of today’s price arises from the E&P portfolio; possibly more than 50 percent is arising out of on the E&P side. The refining and the marketing side, which is accounts for 50 percent of its share price today, are highly uncertain. Those things are not expected to change favourably, given that FY14 is election year for the government. We are not expecting stringent measures coming and the way they were implemented in the year gone up. We don’t see that happening in CY13 because the headroom is limited for government on the vote bank. So, in that terms, there aren’t too many positives expected for OMCs in the year to come. Hence, we do not like that space for long-term investment. Q: What is with your target price on Petronet LNG? A: We have a target price of Rs 187 on Petronet LNG. We like it mainly on the theme that Liquefied Natural Gas (LNG) demand will remain strong. LNG prices globally should start declining in some time from now, given the supply base is increasing globally. We like that theme. That is the reason we are recommending a buy.