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Tuesday, March 31, 2009

Cairn India - Buy Stock Report - Value Midcap From Petroleum Sector

Cairn’s production from its Rajasthan field is set to begin shortly after a long investment phase and this marks a good time for the long-term investors to buy stocks of this midcap stock as an good intrinsic value investment.

CAIRN India (CIL) is set to emerge as one of India’s leading petroleum producer - and possibly the largest onshore producer - once its oilfields in Rajasthan reach peak production in 2 years. The company is about to commence production at its largest Mangala field and scale it up gradually to 80,000 barrels per day by the end of this year. Its growth prospects look attractive for long-term investors.

Business:
Cairn India, which is a 64.7% subsidiary of the UK-based Cairn Energy, holds petroleum exploration and production (E&P) rights in 14 blocks across India. It is an operator in two blocks - with a 22.5% stake in Ravva field off the eastern coast and 40% in Cambay basin fields - which together produced around 67,600 barrels of oil equivalent per day (boepd) in 2008. Out of this, Cairn’s share worked out to around 17,600 boepd.

CIL made an important hydrocarbon discovery in Rajasthan in 2004 and, after further discoveries, has established inplace reserves of 3.6 billion barrels of oil equivalent (boe). It holds 70% operator’s stake in this field and the remaining 30% is held by ONGC. The company recently acquired exploration rights in one block in Sri Lanka.

The crude oil produced from the Rajasthan fields has high wax content and therefore needs to be heated while being transported through a pipeline. The land-locked nature of the oil field also makes marketing of this crude difficult. The company has overcome these difficulties by changing the point of delivery to the coast of Gujarat from Barmer and the cost of constructing the pipeline - nearly $800 million - was included in the field development programme expenses.

Growth Drivers:
The company intends to start the production of 30,000 bpd by October this year and raise it to 80,000 bpd by January 2010. By July 2010, the Mangala field will operate at full capacity of 1, 25,000 bpd. The Bhagyam and Aishwarya fields will come on stream in 2011, thereby raising the peak rates to 1,75,000 bpd.

The smaller fields in the Rajasthan - Rageshwari and Saraswati - can add another 10,000-15,000 bpd. CIL plans to drill nearly 300 more wells in these blocks and use enhanced oil recovery (EOR) measures from the early phase to improve the production levels in the future.

The company’s exploration efforts elsewhere in the country are also on schedule and hold a possibility for new discoveries.

Financials:
The consolidated profit of CIL stood at Rs 785 crore for the year ended December 2008, with Rs 446 crore coming from other income. The company is carrying a cash balance of Rs 2,943 crore, over and above its debt, for funding its capex plans. It generates healthy cash-flows from operations and had raised Rs 2,500 crore through preferential equity placement in April 2008 to build this war chest.

Valuation:
At the prevailing market price of Rs 188, the company is trading at 45.6 times 12 months profits. However, its current valuations are more dependent on expected petroleum output rather than existing operations.

If the company meets its production targets, it should report net profit of Rs 849 crore in FY2010 and Rs 5,144 crore in FY2011. The existing market price is 41.7 times the profits of 2009 but merely 6.9 times the expected 2011 profits. The company’s profitability would go up further after it commences peak production of 1,75,000 bpd in 2011. Buying stocks of Cairn is advisable at this moment due to clear visibility of profits growing for the company in next couple of years.

Shareholding pattern
Total shareholding of Promoter and Promoter Group: 64.68%
Foreign/Institutional Investors: 14.50%
Public shareholding: 20.82%

Risk Factors:
The price movement of crude oil is the key risk for Cairn. The oil prices, which crashed to $35 in December 2008 from $145 in July 2008, have recovered over the past couple of months. But if they remain soft for a protracted period of time, Cairn’s realisations and profitability would take a hit. A substantial appreciation of the rupee against the dollar will also impact the company adversely.

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