Cairn india the value underneath to shine through


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Cairn india the value underneath to shine through

  1. 1. l Equity Research lIndia l Oil & Gas 27 August 2012Cairn IndiaThe value underneath to shine through Our meeting with Cairn India reinforces confidence in its  OUTPERFORM (unchanged) medium-term upside, notwithstanding management PRICE as at 23 August 2012 PRICE TARGET changes. Cairn continues to remain focussed on building a portfolio Rs344.05 Rs387.00 of producing and exploration blocks even as pipeline capacity could constrain volumes to 175kbpd till end-FY13. Bloomberg code Reuters code CAIR IN CAIL.NS Potential approvals for augmenting Bhagyam/Aishwarya Market cap 12 month range could slow ramp up (230kbpd only by mid-2014). Exploration approval key for the pace of reaching 300kbpd. Rs656bn (US$12bn) Rs249.30 - 401.10 Though core DCF goes up to Rs429 (Rs400 earlier) mainly EPS adj est change 2013E -5.4% 2014E 1.5% on higher exploration upside and a weaker rupee, our price target is now based on 10% discount to NAV to factor in evolving re-investment risks. Maintain OP.Faster monetisation remains key. While Rajasthan ramp-up Year end: March 2012 2013E 2014E 2015E Sales (Rsbn) 119 150 164 159/exploration will form the bedrock, successful exploration in Sri EBITDA (Rsbn) 102 141 149 147Lanka and KG onshore could form future pillars of growth. EBIT (Rsbn) 88 125 128 125 Pretax profit (Rsbn) 85 125 128 125Cairn‟s volumes will remain flat at 175kbpd till end-FY13 due to Internal Use Only Net profit adjusted (Rsbn) 80 116 115 99pipeline bottlenecks and as management undertakes trial runs FCF (Rsbn) 64 67 68 46 EPS adjusted (Rs) 42.15 60.97 60.34 52.07on Drag Reducing Agents (DRA), followed by Management DPS (Rs) 0.00 17.51 16.76 13.82Committee (MC) approval. Further ramp up (beyond 185- Book value/share (Rs) 253.18 291.05 327.30 357.19 Not For Distribution190kbpd) might require fresh FDP for Bhagyam/ Aishwarya EPS growth adj (%) 30.3 44.6 -1.0 -13.7 DPS growth (%) - nm -4.3 -17.5augmentation, potentially pushing out ramp-up to 230kbpd by EBITDA margin (%) 85.7 94.2 91.0 92.2mid-14 (vs. end-13 earlier). We accordingly moderate volumes EBIT margin (%) 73.6 83.4 78.2 78.5 Net margin adj (%) 67.6 77.8 70.1 62.5to 171/201/228kbpd for FY13/14/15E vs. 180/214/230kbpd Div payout (%) 0.0 28.7 27.8 26.5earlier. We also factor in 1) weak INR/USD and 2) firm Brent Net gearing (%) -5.3 -15.4 -20.1 -23.3 ROE (%) 18.2 22.4 19.5 15.2price, thus changing FY13/14 estimates by -5/2%. ROCE (%) 18.9 23.6 21.2 18.3 EV/Sales (x) 5.1 3.8 3.2 3.1Concerns on churn overdone, exploration on the agenda. EV/EBITDA (x) 6.0 4.1 3.6 3.4 PBR (x) 1.3 1.2 1.1 1.0Even as near-term volumes remain flat, management is PER adj (x) 7.7 5.6 5.7 6.6targeting faster exploration drives and production start at Dividend yield (%) 0.0 5.1 4.9 4.0 Source: Company, Standard Chartered Research estimatesBarmer to lead to 300kbpd. However, the timing of explorationapprovals (management aims to spend US$600m over the next Share price performance2 years) is critical for achieving this potential. We factor peak of 400230kbpd in our explicit field cash flows/DCF and prefer to valuethe recovery/appraisal/exploration upside on EV per entitlement 320boe of US$15-20, at 38-53% discount to the imputed value in 240explicit DCF for MBA fields. Concerns regarding management Aug-11 Nov-11 Feb-12 May-12 Aug-12churn are overdone as (i) the overall strength of the sub-surface Cairn India BSE SENSEX 30 INDEX (rebased)team has remained stable with (ii) adequate replacement forthe recent departures. Share price (%) -1 mth -3 mth -12 mth Ordinary shares 7 8 30 Relative to Index 1 -4 20Maintain OP with PT of Rs387. Our SOTP based PT Relative to Sector - - - Major shareholder Promoter (58.9%)moderates to Rs387 as we factor in 1) higher exploration Free float 41%upside but, 2) explicitly factor in a 10% discount to NAV to build Average turnover (US$) 22,919,530in cash re-investment risks post management transition. Source: Company, FactSetMaintain OP.Rahul Singh Avishek Datta Saurav 22 4205 5901 +91 22 4205 5909 +91 22 4205 5910Important disclosures can be found in the Disclosures AppendixCAIR INRs344.05All rights reserved. Standard Chartered Bank 2012Rs387.00
  2. 2. Cairn India l 27 August 2012 Near-term blip, but momentum intact Cairn India reiterated the strong focus on faster resource monetisation with an eye on building a bouquet of exploration and development projects to drive long-term growth. Even as near-term volumes remain flat, Cairn India is taking steps to ramp up volume to 190/230kbpd in the medium term followed by 300kbpd through exploration and exploitation of the Barmer resource. Though concerns over management churn are overdone, we believe cash re-investment risks could become real going forward. Pipeline constrain and potential FDP filing could slow ramp up Accordingly, we moderate Rajasthan volumes to 171/201/228kbpd for FY13/14/15E vs. 180/214/230kbpd earlier. We also tweak to factor in 1) weak exchange rate and 2) firm Brent price and change Cairn India‟s FY13/14 estimates by -5/2%, respectively. 1. Cairn India continues to produce at near peak infrastructure levels of 175kbpd with Bhagyam producing at 25kbpd. Trial runs are currently on to increase pipeline capacity to >200kbpd by use of Drag Reducing Agents (DRA). On successful completion of trials (~2-3 months), Management Committee (MC) approval is required as it involves some capex and will add US$6cents/bbl to operating expense (1QFY13 opex US$2.3/bbl). This means production will remain flat at 175kbpd till end-FY13. 2. Potential requirement to file revised FDP for increased production at Barmer and Aishwarya could further delay the ramp-up to 230kbpd by mid-14 (from end-13 earlier). Fig 1: Volume assumptions FY12A FY13E FY14E FY15E Old New % change Old New % change New Rajasthan volumes 131.0 180.0 171.2 -4.9% 214.0 200.6 -6.3% 227.5 (kbpd) Brent (US$/bbl) 111.8 122.5 111.0 -9.4% 125.0 114.0 -8.8% 114.0 Exchange (US$/Re) 48.4 49.9 54.2 8.6% 47.9 55.8 16.5% 54.5 EPS (Rs) 41.1 64.4 61.0 -5.3% 59.4 60.3 1.5% 52.1 Source: Company, Standard Chartered Research estimates However, management remains focussed on 300kbpd Even as near-term volumes remain flat, management is targeting faster exploration drive and production start at Barmer to increase volumes to 300kbpd. Cairn India plans to spend US$600m on increased exploration activity and expects faster government approvals to drive volumes. Building a bouquet of projects Even as Cairn India‟s management focus remains on faster monetisation of the Rajasthan resource, the company is also expediting exploration work in KG onshore and Sri Lanka. This is necessary to continue its long-term growth momentum. We, however, do not ascribe any value to the non-Rajasthan exploration upsides.  In Sri Lanka, Cairn India has completed 3D seismic work, which led to 2 discoveries in the Mannar basin. The next phase of exploration work will commence in mid-2013.  KG-ON: The Cairn India-led consortium has notified the Management Committee of an oil discovery in the Nagayalanka-SE-1 well, in the onshore block KG-ONN-2003/1, in the Krishna-Godavari Basin on the east coast of India. A gross 57m hydrocarbon column in Cretaceous sandstone between the depths of 4369.2- 4426mMD has been interpreted from log data, core and testing data, to be oil bearing. Initial estimates suggest in place resource of 500mnboe.  South Africa: Cairn India has entered into a farm-in agreement with PetroSA to explore for crude oil and natural gas in the offshore Block 1 in the Orange Basin on the west coast of South Africa. The closure of the transaction is subject to South African regulatory approvals. It has an existing gas discovery and identified oil and gas leads and prospects. Located in thel Equity Research l 2
  3. 3. Cairn India l 27 August 2012 geologically proven Orange Basin along the north western maritime border of South Africa with Namibia, the block is on trend with the discovered Kudu and Ibhubesi gas fields. Maintain OP with a PT of Rs387 We maintain our OP rating on CIL as it remains a pure play on firm crude price and weak exchange rate. We moderate our SOTP based PT to Rs387 as we factor in 1) recent reserve accretion and 2) explicitly factor in a 10% discount to NAV to build in cash utilisation concerns from faster-than-expected management transition to Vedanta. Fig 2: Cairn SOTP New Old NPV NPV Comments Rs/sh Rs/sh Ravva & Cambay 8 8 MBA- core 262 258 Production & Development 269 266 Overheads -14 -15 FY12 overhead expenses charged Net Cash/(Debt) 58 75 Estimated Net Debt as on Dec-12 Core NAV 314 325 Rajasthan Upside 116 74 Net Asset Value 429 400 Discount to NAV @10% 43 - Price Target 387 400 Source: Standard Chartered Research estimates Fig 3: Rajasthan resource base potential Rajasthab (bn boe) 31st March 2012 31st March 2011 Gross Hydrocarbons Initially In Place 7.3 6.5 MBA 2.1 2.1 Satellite/LPD discoveries 2.1 1.9 Prospective 3.1 2.5 Recoverable (EUR) 1.7 1.4 MBA + EOR 1.00 1.00 Satellite/LPD discoveries 0.18 0.15 Prospective 0.53 0.25 Source: Company Fig 4: Rajasthan valuation summary Recovered Entitlement Value $/bbl $ NPV (Gross) (net) MBA 998 286 32.2 9224 Low Permeability Discoveries/Barmer 180 52 Resource Upside 180 52 20.0 1033 CILs net entitlement (%) 29% Mangala Recovery Factor 4% upside 52 15 20.0 297 Bhagyam Recovery Factor 8% upside 37 11 20.0 215 Aishwarya Recovery Factor 15% upside 44 13 20.0 252 Company Exploration Upside 530 152 15.0 2281 estimate Upside 663 190 16.0 3045 Source: Standard Chartered Research estimatesl Equity Research l 3
  4. 4. Cairn India l 27 August 2012 Income statement (Rsbn) Cash flow statement (Rsbn) Year end: Mar 2011 2012 2013E 2014E 2015E Year end: Mar 2011 2012 2013E 2014E 2015E Sales 103 119 150 164 159 EBIT 72 88 125 128 125 Gross profit 88 96 139 150 140 Depreciation & amortisation 12 14 16 21 22 SG&A (4) (1) (2) (2) (2) Net interest (3) (2) (2) (2) (2) Other income 1 9 8 11 14 Tax paid (6) (5) (8) (13) (26) Other expenses (14) (17) (20) (32) (28) Changes in working capital 0 0 0 0 0 EBIT 72 88 125 128 125 Others (6) (2) (9) (12) (9) Net interest (3) (2) 0 0 0 Cash flow from operations 69 93 122 122 110 Associates 0 0 0 0 0 Other non operational 0 0 0 0 0 Capex (34) (29) (54) (54) (64) Exceptional items 0 0 0 0 0 Acquisitions 6 (7) 18 0 0 Pretax profit 69 85 125 128 125 Disposals 0 0 0 0 0 Taxation (6) (5) (8) (13) (26) Others 0 0 0 0 0 Minority interests 0 0 0 0 0 Cash flow from investing (28) (36) (36) (54) (64) Exceptional items after tax 0 0 0 0 0 Net profit 63 80 116 115 99 Dividends 0 0 (37) (31) 0 Issue of shares 0 (0) 0 0 0 Net profit adj 63 80 116 115 99 Change in debt (7) (27) 0 0 0 EBITDA 84 102 141 149 147 Other financing cash flow 1 (4) 4 2 (14) Cash flow from financing (6) (31) (33) (29) (14) EPS (Rs) 32.36 42.15 60.97 60.34 52.07 EPS adj (Rs) 32.36 42.15 60.97 60.34 52.07 Change in cash 36 25 52 39 32 DPS (Rs) 0.00 0.00 17.51 16.76 13.82 Exchange rate effect 0 0 0 0 0 Avg fully diluted shares (m) 1,957 1,907 1,907 1,907 1,907 Free cash flow 35 64 67 68 46 Balance sheet (Rsbn) Financial ratios and other Year end: Mar 2011 2012 2013E 2014E 2015E Year end: Mar 2011 2012 2013E 2014E 2015E Cash 45 70 122 162 194 Operating ratios Short term investments 0 0 0 0 0 Gross margin (%) 85.3 81.1 92.8 91.5 88.2 Accounts receivable 0 0 0 0 0 EBITDA margin (%) 81.3 85.7 94.2 91.0 92.2 Inventory 0 0 0 0 0 EBIT margin (%) 69.7 73.6 83.4 78.2 78.5 Other current assets 35 51 49 54 52 Net margin adj (%) 61.5 67.6 77.8 70.1 62.5 Total current assets 80 121 171 216 246 Effective tax rate (%) 8.1 5.7 6.7 10.3 20.5 Sales growth (%) 520.9 15.4 25.8 9.9 -3.2 PP&E 120 134 173 206 248 Net income growth (%) 502.6 26.9 44.6 -1.0 -13.7 Intangible assets 253 253 253 253 253 EPS growth (%) 498.3 30.3 44.6 -1.0 -13.7 Associates and JVs 0 0 0 0 0 EPS growth adj (%) 498.3 30.3 44.6 -1.0 -13.7 Other long term assets 12 25 7 7 7 DPS growth (%) - - nm -4.3 -17.5 Total long term assets 385 413 433 466 508 Efficiency ratios Total assets 465 534 604 682 754 ROE (%) 17.1 18.2 22.4 19.5 15.2 ROCE (%) 17.7 18.9 23.6 21.2 18.3 Short term debt 29 45 37 36 35 Asset turnover (x) 0.2 0.2 0.3 0.3 0.2 Accounts payable 0 0 0 0 0 Op cash / EBIT (x) 1.0 1.1 1.0 0.9 0.9 Other current liabilities 0 0 0 0 0 Depreciation / CAPEX (x) 0.4 0.5 0.3 0.4 0.3 Total current liabilities 29 45 37 36 35 Inventory days 0.0 0.0 0.0 0.0 0.0 Accounts receivable days 0.0 0.0 0.0 0.0 0.0 Long term debt 27 0 0 0 0 Accounts payable days 0.0 0.0 0.0 0.0 0.0 Convertible bonds 0 0 0 0 0 Deferred tax 6 7 12 21 38 Leverage ratios Other long term liabilities 0 0 0 0 0 Net gearing (%) 2.8 -5.3 -15.4 -20.1 -23.3 Total long term liabilities 33 7 12 21 38 Debt/capital (%) 12.9 9.1 6.5 5.6 4.9 Interest cover (x) 24.7 38.8 nm nm nm Total liabilities 62 52 49 57 73 Debt/EBITDA (x) 0.6 0.5 0.3 0.2 0.2 Current ratio (x) 2.7 2.7 4.6 6.0 7.1 Shareholders‟ funds 403 483 555 624 681 Minority interests 0 0 0 0 0 Valuation EV/Sales (x) 6.4 5.1 3.8 3.2 3.1 Total equity 403 483 555 624 681 EV/EBITDA (x) 7.9 6.0 4.1 3.6 3.4 EV/EBIT (x) 9.2 6.9 4.6 4.1 4.0 Total liabilities and equity 465 534 604 682 754 PER (x) 10.0 7.7 5.6 5.7 6.6 PER adj (x) 10.0 7.7 5.6 5.7 6.6 Net debt (cash) 11 (25) (85) (125) (159) PBR (x) 1.7 1.3 1.2 1.1 1.0 Year end shares (m) 1,957 1,907 1,907 1,907 1,907 Dividend yield (%) 0.0 0.0 5.1 4.9 4.0 Other US$/Rs 46 48 54 56 55 Brent ($/bbl) 111 112 113 114 114 Henry Hub ($/mcf) 8 8 8 8 8Source: Company, Standard Chartered Research estimatesl Equity Research l 4
  5. 5. Cairn India l 27 August 2012 Disclosures appendix The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated. SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year for the following companies: Cairn India Ltd. Cairn India Ltd. 10/04/12 OP : Rs400.00 400 380 360 340 320 300 280 260 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Source: FactSet prices / SCB ratings and price targets Recommendation Distribution and Investment Banking Relationships % of companies assigned this rating % of covered companies with which SCB has provided investment currently assigned this rating banking services over the past 12 months OUTPERFORM 61.1% 11.0% IN-LINE 30.7% 12.3% UNDERPERFORM 8.2% 8.3% As of 30 June 2012 Research Recommendation Terminology Definitions The total return on the security is expected to outperform the relevant market index by 5% or more OUTPERFORM (OP) over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market IN-LINE (IL) index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or UNDERPERFORM (UP) more over the next 12 months SCB uses an investment horizon of 12 months for its price targets. Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. 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