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Sunday, December 28, 2008

CAIRN INDIA - Stock To buy

Cairn India’s new discovery of oil and gas in its Rajasthan block (RJ-ON-90/1) is a positive trigger for the stock.

Reco price: Rs 160
Current market price: Rs 159.75
Target Price: Rs 240
Upside: 50.2%
Brokerage: Kotak Securities


Cairn India’s new discovery of oil and gas in its Rajasthan block (RJ-ON-90/1) is a positive trigger for the stock. Although, the management has not disclosed details of the reserves, this discovery increases the likelihood of upward revision to Cairn’s reserve estimates. The brokerage believes that the market is penalising the stock, due to the sharp correction in crude oil prices. The stock is currently discounting low crude oil prices in perpetuity and no accretion to reserves.

Checkout: Cairn India - Buy Report From Icici Securities

The reverse valuation exercise of the brokerage suggests that Cairn’s current stock price of Rs 160 is discounting $52 per barrel (dated Brent basis) from CY09E (start of production from Rajasthan block) in perpetuity. However, it is discounting $30 per barrel from CY13E in perpetuity versus the brokerage’s long-term normalised crude price assumption of $75 per barrel (from CY13E) if CY09-12E assumptions turn out to be correct. The brokerage has modelled $70 per barrel for CY09E, $73 per barrel for CY10 and $75 per barrel for CY11-12E and $75 per barrel from CY13E in its base earnings model and long-term rupee-dollar exchange rate at 45. It advises investors to make use of this opportunity to buy the stock given favourable risk-reward balance at current levels. At Rs 160, the stock is trading at a P/E of 12.8 times and EV/EBITDA of 8.4 times its CY09E earnings. Maintain buy.

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