Buy Cairn India, target of Rs 224: Edelweiss

Edelweiss’s report on Cairn IndiaCairn India (CAIR) reported a subdued Q2FY16 with EBITDAX (down 29% QoQ, 65% YoY) 20% below estimates. Earnings were impacted by the sharp 22% QoQ fall in realisation against 18% QoQ fall in Brent, as discount of Cairn’s heavy-crude widened against Brent (14.3% from 10% QoQ). Operating cost increased 11% QoQ to USD6.4/bbl due to higher polymer injection and 4% QoQ rise in water-flood opex amid lower volumes. Reversal of tax expense (INR1.3bn) and higher forex gains resulted in a better PAT performance (13% above estimates). Lower energy prices is resulting in better cost efficiencies, with 13% savings in procurement cost and a 15% cut in well drilling costs. Management remained confident about a 10-year PSC extension beyond 2020 and a possible reduction in cess, while retaining the production guidance for FY16. Merger risks, though unlikely, will continue to weigh on the stock. However, Cairn’s huge cash pile (~60% of current value) and handsome dividend yield (6%) will effectively cap potential downside. Maintain ‘BUY’, but lower TP to INR 224 (INR 241 earlier) factoring higher price discount for Rajasthan crude.Outlook and valuations: Cash caps downside; maintain ‘BUY’  The stock price is currently discounting “zero” value to existing cash (~60% of the current market value). Merger risks will remain an overhang. At current valuations of 9.5x FY17E PER, risk‐reward looks extremely favourable given 6% dividend yield and healthy cash generation. Maintain ‘BUY/SO’ with target price of INR 224, says Edelweiss Securities Limited research report.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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