Buy Cairn India; target Rs 163: Motilal Oswal

Cairn India Aug 20, 2007 at 01.16 PM

Buy Cairn India; target Rs 163: Motilal Oswal

Research firm Motilal Oswal Securities has recommended buy rating on
Cairn India with target price of Rs 163. Research firm values Cairn's
Rajasthan block (including EOR) and its currently producing blocks
(Ravva and Cambay) on DCF basis and Cairn's stake in the KG block
based on announced 2P reserves of 2.09TCF.

Motilal Oswal report on Cairn India:

Pipeline concern getting resolved:

Resolution of the pipeline issue will enable monetisation of Cairn's
largest and most promising asset, Rajasthan block by 2HCY09. Though,
there still remain several uncertainties on cess, pricing and crude
offtake, we believe these will not hamper the initial oil delivery
schedules. Successful development of Rajasthan block, which will
catapult Cairn into bigger league, will be the key driver to its
performance, in our view.

Rajasthan block; already a world-class oil asset; holds promise
for more:

The Rajasthan block RJ-ON-90/1, is Cairn's main asset accounting for
80% of its total reserves. Of the total current gross inplace
resources of 3.6 b boe, 2.2 b boe are currently in development phase.
There remains upside from area already being developed and more
development area is being added.

Large exploration acreage provides upside; two producing
assets provide the cash:

Cairn also has large exploration acreage of about 94,800sq km in 12
other blocks, including 5 as operator. The most promising of these is
ONGC operated (Cairn 10%) deep water block KG-DWN-98/2. Cairn has
successfully extended plateaus for both its operating assets at Ravva
and Cambay, by successful infill development and further exploration
and development drilling.

Valuation and recommendation

We value Cairn's Rajasthan block (including EOR) and its currently
producing blocks (Ravva and Cambay) on DCF basis. We also value
Cairn's stake in the KG block based on announced 2P reserves of
2.09TCF. Upside potential to valuation comes from these blocks as well
as other blocks in its stable. We value Cairn on Sum of Parts basis at
Rs 163 per share. We initiate coverage with a Buy.

The Rajasthan block, which is set to commence production in 2009,
provides 87% of value of our current value. With the block still in
early stage of exploration and development, we believe it continues to
have significant upside potential. We value Cairn's currently
producing assets (Ravva and Cambay) at Rs 16 per share. We assign a
value of Rs 5 per share, to Cairn's 10% interest in the KG-DWN-98/2.
We do not attribute any value to Cairn's other exploration acreage in
9 blocks, as all these blocks are still in early stages of
exploration.

Key risks

Oil prices:

We believe high oil prices are here to stay, and assume the long-term
average Brent oil price at USD 55/bbl. We also assume that Cairn's
Rajasthan crude will be sold at 10% discount to Brent. A lower oil
price environment and/or higher actual discounts for Rajasthan crude
pose downside risk to our estimate.

Cess:

We assume Cairn will be required to pay cess (levy) of Rs 927/MT v/s
the current cess rate of Rs 2,675/MT (including education tax and NCCD
cess). Cairn believes it is not liable to pay any cess and is
currently contesting cess payment with the GoI on the issue, and
indicates that in case of an adverse decision, Cairn will opt for
arbitration. Higher cess payment than our estimate will be negative
for Cairn by Rs 18 per share; similarly if Cairn is required not to
pay any cess, it will be positive by Rs 12 per share.

Pipeline:

We assume that GoI will approve Cairn and ONGC's jointly planned
pipeline to evacuate Rajasthan crude. We also assume that the pipeline
will be included in FDP for the Rajasthan block. Based on these
assumptions, we assume Cairn to begin production from the Rajasthan
block in October 2009. However, any significant delays in final
approval of the pipeline and/or non-inclusion of pipeline cost in FDP
will be negative for our estimates.

EOR:

The company has indicated that it plans to utilize EOR techniques to
enhance production rates and plateau periods. In our estimates we
assume recovery of 196mmboe (Cairn share 138mmboe) through EOR.
Currently the company is testing EOR techniques at laboratory levels.
Non-implementation of EOR, or lower recovery of oil through EOR, will
result in downside to our estimates. We currently value EOR recoveries
at Rs 19 per share