Hold Cairn India; target of Rs 245: ICICI Direct

ICICI Direct's research report on Cairn India

Cairn India, through its various initiatives such as EOR, reservoir management has continued to arrest the natural decline in wells and reported additional volumes this quarter. The polymer injection at Mangala EOR has led to additional production of 10 kboepd in Q2FY17, for Aishwariya EOR and Barmer EOR. The polymer injection is planned to begin in H1CY18 and Q1CY19, respectively. Ravva and Cambay block continued to show a natural decline in the well (down 3.9%, 4.2% QoQ, respectively). Various opportunities are being targeted to arrest the decline. In terms of production, Cairn’s Q2FY17 production numbers QoQ came largely in line with the flat production guidance provided by the company from Rajasthan fields for FY17E. Rajasthan gross production remained flat QoQ at 167699 barrels per day (bpd) in line with our estimate of 167168 bpd. We expect production from the Rajasthan field at 167843 boepd and 170834 boepd in FY17E and FY18E, respectively.

The revised Cairn-Vedanta merger deal has been approved by the respective shareholders of Cairn India and Vedanta Ltd and is stated to effective by end of FY16, post approval of jurisdictional high courts and other regulatory entities. The revised deal for shareholders of Cairn India consists of equity swap ratio of 1:1 and additional four preference shares of Rs 10 each carrying 7.5% coupon with 18 months tenure. The revised ratio gives incremental benefit of | 30 per share for Cairn India’s shareholders vs. the earlier ratio. We increased our Brent crude oil estimates to $50/bbl for both H2FY17E and FY18E, respectively. We have revised our estimates by factoring in reduced operational expenses and lower Rajasthan oil realisation discount to Brent oil prices (12.5% vs. 16% earlier). We estimate Cairn’s fair value at Rs 245/share (Rajasthan fields at Rs 93/share) assuming $50/barrel FY19E onwards and assuming no discount to cash and cash equivalent. At the current price, Cairn India is currently trading at an implied Brent crude price of US$44/barrel. We have a HOLD recommendation on the stock.