Cairn India Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Oil Exploration

Company

Cairn India Ltd

Reco Price
Rs. 262.35
Price Target (1 Year)
Rs. 315.00
Upside
20.07%

Date

December 09, 2016
Sensex
26747.18
CNX Nifty
8261.75

Exchange

Code

NSE
CAIRN
BSE
532792

Merger with Vedanta will be the key trigger for the stock

Brownfield expansions will lead to low cost, high margin production:
Cairn India produced 206230 Barrels of Oil Equivalent Per Day (BOEPD) in the second quarter ended September 30, 2016. More than 80% of the production came from its Rajasthan block which gave 167699 of BOEPD. The Ravva field in the Bay of Bengal contributed by 9%, producing 18823 BOEPD, whereas Cambay contributed by 4% producing 9877 BOEPD. The company is planning to invest Rs 30,000 crores within the next three years to increase its output capacity by 50%, thereby producing an additional 100000 barrels of oil per day and oil equivalent gas. This will primarily be achieved from its prolific Rajasthan fields. The company has also upgraded its injection water capacity to 700000 barrels per day by commissioning of surface facilities for its Thumbli pipeline.

Improved Oil recovery:
Cairn is also investing in Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR) schemes to sustain its production from the oil fields. It is also planning to invest Rs 670 crores, out of which 80% will be used in developing Raageshwari Deep Gas (RDG) project and completion of Mangala EOR activities. During FY15, the gas production was 16 Million Standard Cubic Feet per Day (MSCFD), which increased to 28 MSCFD in Q1FY17 and 33 MSCFD in Q2FY17. It plans to increase the production to 45 MSCFD by the end of FY17 and also has the potential to reach the 100 MSCFD mark in the future. The company continues to take measures to improve economies of key projects in core MBA (Mangala, Bhagyam and Aishwariya) fields, Hills and Satellite fields, and invest in pre-development activities to ensure their readiness for development with grant of extension of Product Sharing Contracts.

Merger with Vedanta:
Vedanta Ltd has a complex business structure with large portfolio including Zinc, Lead, Silver, Copper, Aluminium, Power, Iron Ore and Oil & Gas. Cairn India is one of the subsidiaries of Vedanta with a near 60% ownership. Through the merger, Cairn’s Oil & Gas exploration will become a small part of the total diversified revenue stream of Vedanta Ltd. Subsequently, this will help the company to become India’s largest diversified natural resource firm, which can compete with BHP Billiton and Vale SA. Through the merger, Vedanta is keen on utilizing Rs 23290 crores cash lying with Cairn to pay off a part of its Rs 77952 crores debt. The shareholders will benefit from the exposure to a well diversified portfolio of Tier-I assets will which reduce the risk of earnings by providing stable cash flows and drive long term value to the company. Cairn will remain perpetually hedged due to its exposure to several cycles from a pure play of oil and gas which helps in better positioning of the company.

Future Roadmap:
The company plans to increase its gas production from RDG through the existing pipeline by installing additional compressors. It holds a significant potential of 1-3 Trillions of Standard Cubic Feet (TSCF) of gas of GIIP. Also, the estimated recovery has increased by ~25%. The recovery estimate till 2030 has increased to 86 Metric Million Barrels of Oil Equivalent (MMBOE). The growth in production from existing fields will be achieved through the EOR programme in the MBA field, and further development of Barmer Hill and Rageshwari field. We expect production from the Rajasthan field at 167717 BOEPD and 170834 BOEPD in FY17E and FY18E, respectively.

Stock Data

CMP (Rs)
264.65
Face value (Rs)
10
52 Week Range (Rs)
264.30 - 106.50
Market cap (Rs Crores)
49466.31
Price To Book Value (x)
1.01
P/E Ratio (x)
0.00
EV/EBIDTA (x)
9.52

One Year indexed Stock Performance

Cairn India LtdSensex
Cairn India Ltd
Return (%)
1m
6m
12m
36m
Absolute
9.09
80.77
110.21
-18.18
Sensex
-1.85
-0.06
6.83
25.42

Shareholders

(in %)
30-Sep
Promoter
59.86
Public
40.14
Others
0.00
Total
100

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Industry

The oil and gas sector is among the six core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. The Government of India has adopted several policies to fulfil the increasing demand. The government has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others. Total fuel consumption is expected to grow around 5-6 per cent in FY 2016-17 and thereafter, while consumption of gasoline is expected to grow around 9-10 per cent over the medium term, supported by robust passenger vehicle sales amid low crude oil prices.

India is the fourth-largest Liquefied Natural Gas (LNG) importer after Japan, South Korea and China, and accounts for 5.8 per cent of the total global trade.3Domestic LNG demand is expected to grow at a CAGR of 16.89 per cent to 306.54 MMSCMD by 2021 from 64 MMSCMD in 2015. The country's gas production is expected to touch 90 Billion Cubic Metres (BCM) in 2040 from 35 BCM in 2013. Gas pipeline infrastructure in the country stood at 15,808 km in December 2015.

Profile

Cairn India is one of the largest independent oil and gas exploration and production companies in India with a market capitalization of more than USD 7 billion. The company sells their oil to four major refineries in India. They also market their gas to public and private players. It has been operating for more than 20 years playing an active role in developing India's oil and gas resources. Cairn India has a portfolio of 8 blocks - one block in Rajasthan, two on the west coast and four on the east coast of India and one in South Africa. Oil and gas is currently being produced from Barmer, Ravva and Cambay.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Margin (%)
  • Adjusted EPS
  • 18761.70
  • -
  • 5075.98
  • 13685.72
  • 72.94
  • 1502.71
  • 15188.43
  • 41.48
  • 15146.95
  • 2297.36
  • 12849.59
  • -
  • 12849.59
  • 417.80
  • 12431.79
  • 66.26
  • 65.17
  • 14646.20
  • -21.94
  • 6142.55
  • 8503.65
  • 58.06
  • 1828.25
  • 10331.90
  • 20.34
  • 10311.56
  • 2569.47
  • 7742.09
  • -2633.00
  • 5109.09
  • 629.49
  • 4479.60
  • 30.59
  • 23.89
  • 8625.57
  • -41.11
  • 590.85
  • 3234.72
  • 37.50
  • 2138.56
  • 5373.28
  • 26.96
  • 5346.32
  • 3107.15
  • 2239.17
  • -11673.80
  • -9434.63
  • -2.75
  • -9431.88
  • -109.35
  • -50.31
  • 9142.40
  • 5.99
  • 4758.00
  • 4384.40
  • 47.96
  • 2000.50
  • 6384.90
  • 74.50
  • 6310.40
  • 3211.00
  • 3099.40
  • -
  • 3099.40
  • 619.88
  • 2479.52
  • 27.12
  • 13.90
  • 10125.00
  • 10.75
  • 5050.50
  • 5074.50
  • 50.12
  • 2000.50
  • 7075.00
  • 74.50
  • 7000.50
  • 3750.00
  • 3250.50
  • -
  • 3250.50
  • 812.625
  • 2437.88
  • 24.08
  • 13.67
Source: Stockaxis Research, Company Data

Valuation

Considering the merger of both companies, Vedanta Ltd has a complex business structure with a large portfolio including Zinc, Lead, Silver, Copper, Aluminium, Power, Iron Ore and Oil & Gas. Cairn India is one of the subsidiaries of Vedanta with an ownership of nearly 60%. Through the merger, Cairn’s oil & gas exploration will become a small part of the total diversified revenue stream of Vedanta Ltd. Subsequently, this will help the company to become India’s largest diversified natural resource firm, which can compete with BHP Billiton and Vale SA.

We feel such a large conglomerate will consolidate its position amongst the key players of our country.

Cairn India minority shareholder will receive for each equity share held:-

• 1 equity share in Vedanta Ltd.
• 4 Redeemable Preference Shares with a face value of INR 10 in Vedanta Limited, with a coupon of 7.5% and tenure of 18 months from issuance.
• Implied premium of 20% to one month VWAP of Cairn India share price.

We feel stock should then trade at a premium considering its strengthened business because of the merged entity, and therefore assign valuation of 23.04x FY2018E indicating a target price of Rs 315 with a long term horizon.

 

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