Cairn India Ltd.

Oil & Gas

Result Review

25 January 2012

EBITDA down on dry well and royalty cost

3QFY12 PAT below our estimates: Despite a 33% YoY rise in
crude oil realisation, Cairn Indias EBITDA declined 7% YoY (up 15% QoQ) in 3QFY12 to Rs24bn due to 1) royalty payment of Rs6.3bn (nil in 3QFY11 as royalty has been made cost recoverable from 2QFY12 onwards); and 2) a higher exploration cost of Rs1.8bn (up 717% YoY due to dry well expenses of Rs1.4bn for the Sri Lanka Block). Reported PAT of Rs23bn (up 13% YoY and 196% QoQ due to a forex gain of Rs3bn) was below our estimate due to higher-than-expected exploration cost and GoIs share of Rs5.7bn in profit petroleum in the Rajasthan block.

Rating: Buy Current Price: Rs352 Target Price: Rs404

Stock Data
52-week high/low O/S shares (m) Mkt Cap Rs (bn) Avg Daily Vol (m) Bloomberg Code Reuters Code Rs372/Rs249 1903 669 2.1 CAIR IN CAIL.BO

Rajasthan crude realisation at USD100.3/bbl, Mangala crude production at 125kbpd: Crude realisation of USD100.3/bbl from
the Rajasthan block was above our expectations and its discount to Brent price also reduced to 8.3% (vs 10.4% in 2QFY12, 13.5% in 3QFY11) as the light-heavy crude price differential narrowed down in 3QFY12. The Mangala field is also producing consistently at 125kbpd.

Shareholding (%)
Promoters FIIs DIIs Public

Sep-11
59.0 6.2 8.3 26.5

Bhagyam started production; FY12 exit rate maintained at 175kbpd: Bhagyam started production in Jan-12 and it is expected to
soon reach a peak production rate of 40kbpd. Approval for ramp-up of production at Mangala to 150kbpd (from 125kbpd currently) and commencement of production at Bhagyam is the key for Cairn India to reach its FY12 exit production target of 175kbpd.

EPS revised upwards: We have increased our FY12 and FY13

120.00 100.00 80.00 60.00 40.00 20.00 Y/E Mar (Rs. mn) 0.00 Apr-11 May-11 Jun-11 Jul-11 Jan-11 Sep-11 Oct-11 Nov-11 Dec-11 Feb-11 Mar-11 Aug-11 Jan-12 Net Sales EBITDA Net Profit EPS (Rs) EPS (growth) Book Value/(Rs.) PER P/BV EV/EBITDA ROE (%) ROCE (%)
Source: Company, IFIN Research

EPS to Rs45.5 and Rs52.4 respectively as we have lowered our tax rate assumption to 12% (versus 22% earlier and management guidance of 5%-9% for FY12 and FY13).

Valuation: We expect Cairn Indias EPS to grow at 25% CAGR over

FY11-FY13. Lower discount to Brent for Cairn Indias crude realisation is an additional positive along with likely production ramp-up. Hence, we maintain our Buy recommendation on the stock with revised target price of Rs404/share from Rs364 earlier (on lower tax rate and change in WACC assumption to 12%). Delay in production ramp and steep fall in crude price are key risks to our earnings and target price.
FY10 16,230 10,114 10,511 5.5 30.8 178.5 63.5 2.0 68.6 3.2 2.8 FY11 102,779 82,451 63,344 33.3 501.1 211.9 10.5 1.7 7.9 17.1 17.7 FY12E 170,687 111,266 86,596 45.5 36.7 257.4 7.7 1.4 5.7 19.4 21.1 FY13E 197,914 119,651 99,621 52.4 15.0 309.8 6.7 1.1 4.5 18.5 20.3

Cairn India

Sensex

Abhijeet Bora
+91-22-43335135 abhijeetbora@ifinltd.in

IFIN Research

25 January 2012

Cairn India Ltd.

Figure 1: Cairn India 3QFY12 results snapshot

INR mn 3QFY12 2QFY12 3QFY11 YoY QoQ FY11 FY12E

Income Statement
Revenues Operating expenses Exploration cost Staff, administrative and other expenses Total Expenses EBITDA EBITDA (%) Other Income Foreign exchange gain Depreciation Interest PBT Tax Tax Rate (%) Adjusted PAT Extra-ordinary items Reported PAT EPS
Source: Company IFIN Research

30,968 4,653 1,763 859 7,275 23,692 76.5 1,124 3,015 3,787 240 23,803 1,184 5.0 22,619 0 22619 11.9

26,522 4,708 389 774 5,871 20,651 77.9 620 5,310 3,142 1,228 22,211 1,029 4.6 21,182 -13,552 7630 4.0

30,964 4,577 216 754 5,546 25,418 82.1 342 0 2,871 742 22,147 2,046 9.2 20,101 0 20101 10.6

0% 2% 717% 14% 31% -7%

17% -1% 353% 11% 24% 15%

102,779 15,170 1,667 3,492 20,329 82,451 80.2

170,687 52,221 3,000 4,200 59,421 111,266 65.2 5,133

229%

81%

1,288

32% -68% 7% -42%

21% -80% 7% 15%

11,930 2,909 68,900 5,556 8.1

15,382 2,612 98,405 11,809 12.0 86,596 0 86596 45.5

13%

7%

63,344 0

13% 12%

196% 196%

63344 33.3

Figure 2: Cairn India 3QFY12 Key operating data

3QFY12 Avg. Oil Price real. (USD/bbl) Gas Price realisation (USD/mscf) Avg. Price realisation (USD/boe) Average Exchange Rate (Rs/USD) 101.1 4.4 98.4 50.7 2QFY12 102.8 4.5 100.3 45.7 3QFY11 75.9 4.5 74.3 44.8 YoY 33% -2% 32% 13% QoQ -2% -2% -2% 11% FY11 79.1 4.6 76.8 46 FY12E 96.8 4.5 94.5 49

Gross op. prod. in India (boepd) Working interest (boepd)

169,580 98,969

169,944 99,220

174,282 100,270

-3% -1%

0% 0%

149,103 83,474

175,780 105,453

Rajasthan Block - RJ ON 90/1 Average gross crude prod. (bpd) Working interest (bpd) Average brent crude price USD/bbl Disc to Brent Crude realisations (USD/bbl)
Source: Company IFIN Research

125,122 87,585 109.4 8.3% 100.3

125,251 87,676 113.4 10.4% 101.6

124,861 87,403 86.0 13.5% 74.8

0% 0% 27% -39% 34%

0% 0% -4% -20% -1%

100,993 70,695 88.7 12.0% 78.1

135,000 94,500 110.0 12.0% 96.8

IFIN Research

25 January 2012

Cairn India Ltd.

Valuation & View

We have increased our FY12 and FY13 EPS to Rs45.5 and Rs52.4 respectively as we have lowered our tax rate assumption to 12% (versus management guidance of 5%-9% for FY12 and FY13). Change in Estimates
FY12E Old New % Change FY13E Old New % Change

Net Sales PAT

170,687 76,662

170,687 86,596

0% 13%

197,914 86,751

197,914 99,621

0% 15%

We have revised our target price to Rs404/share from Rs364 earlier to factor 1) lower tax rate assumption to 12% for FY12 and FY13 and 2) revised WACC assumption at 12% (from 13% earlier) as we have changed our risk free rate to 8.2% (from 8.5% earlier). An announcement of dividend policy, reserve upgrade and approval for production ramp-up are the key near term triggers for the stock. Cairn India: SoTP valuation
FCFF (Rs mn) Rajasthan block Ravva+Cambay KG-DWN98/2 block Exploratory Upside Total Debt Cash Equity value
Source: IFIN Research

Value/sh (Rs/sh) 229 13 11 86 339 10 75 404

435,665 24,035 21000 163800 644501 18,800 143,585 769,286

Recovery mn boe 739 21 35 390

EV/bbl USD/bbl 12 23 12 12

Comments DCF, WACC of 12% DCF, WACC of 12% EV/boe EV/boe

Sensitivity analysis (Cairn Indias target price)

Crude oil price 404 47 48 49 INR/USD 50 51 52 53
Source: IFIN Research

80 359 361 364 366 369 371 373

85 368 371 373 376 379 381 384

90 382 384 387 390 393 396 399

95 395 398 401 404 408 411 414

100 408 412 415 419 422 426 429

105 422 425 429 433 437 440 444

110 435 439 443 447 451 455 459

IFIN Research

25 January 2012

Cairn India Ltd.

Financials- Consolidated
Income Statement Y/E March Net Sales Sales Growth (%) Production cost Statutory Levies Other Expenses EBITDA EBITDA (%) Depreciation & depletion Other Income Tax Tax Rate (%) Adjusted PAT Extraordinary Items Reported PAT PAT Growth (%) FY10 16,230 13.3 2,401 1,390 2,325 10,114 62.3 1,485 1,751 (348) (3) 10,580 69 10,511 30.8 FY11 102,779 533.3 5,255 9,757 5,316 82,451 80.2 11,930 1,288 5,556 8 63,344 0 63,344 502.6 (Rs Million) FY12E 170,687 66.1 5,896 46,324 7,200 111,266 65.2 15,382 5,133 11,809 12 86,596 0 86,596 36.7 FY13E 197,914 16.0 8,276 64,286 5,700 119,651 60.5 17,787 13,573 13,585 12 99,621 0 99,621 15.0 Balance Sheet Y/E March Share Capital Reserves Net Worth Debt Total Current Liabilities and others Total Equity & Liabilities Net Block CWIP Investments Curr. Assets Debtors Cash & Bank Balance Inventory Loans & advances and others Total Assets FY10 18,970 319,714 338,683 34,007 19,425 392,115 6,264 91,635 270,483 23,734 3,067 9,294 2,909 8,462 392,115 FY11 19,019 383,913 402,932 26,782 34,074 463,788 80,085 39,819 264,276 79,608 14,829 44,847 3,277 16,655 463,788 (Rs Million) FY12E 19,019 470,510 489,529 28,200 64,074 581,803 89,703 80,349 264,276 147,476 33,189 59,761 14,224 40,301 581,803 FY13E 19,019 570,130 589,149 18,800 73,528 681,477 96,916 74,995 264,276 245,291 38,483 143,585 16,493 46,730 681,477

Source: Company IFIN Research

Source: Company IFIN Research

Ratios Y/E March EPS (Rs) CEPS (Rs) BV (Rs.) DPS Payout % Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratio (%) RoE RoCE Turnover Ratios Debtors (Days) Fixed Asset Turnover (x) 68.0 8.9 51.9 3.0 70.0 2.3 70.0 2.2 3.2 2.8 17.1 17.7 19.4 21.1 18.5 20.3 63.5 68.6 42.7 2.0 0.0 10.5 7.9 6.3 1.7 0.0 7.7 5.7 3.7 1.4 0.0 6.7 4.5 2.7 1.1 0.0 FY10 5.5 6.3 178.5 0.0 0.0 FY11 33.3 39.6 211.9 0.0 0.0 FY12E 45.5 53.6 257.4 0.0 0.0 FY13E 52.4 61.7 309.8 0.0 0.0

Cash Flow Statement Y/E March Consolidated PAT Depreciation Deferred Tax & others Cash Flow from Operation Inc/(Dec) in WC Operating Cash Flow Capex Free Cash Flow Equity Raised Debt Raised Investment Dividend Paid Misc Expense & others Net Cash Flow Opening Cash Bal. Add: Net Cash Closing Cash Bal. FY10 10,511 1,485 (2,690) 9,307 (8,357) 950 (32,381) (31,431) 74 (9,557) (15,411) 0 349 (55,976) 65,271 (55,976) 9,294 FY11 63,344 11,930 2,780 78,053 (5,861) 72,192 (28,351) 43,841 814 (7,225) 6,180 0 (8,057) 35,553 9,294 35,553 44,847 FY12E 86,596 15,382 (2,521) 99,458 (22,953) 76,505 (65,530) 10,975 0 1,418 0 0 2,521 14,914 44,847 14,914 59,761 FY13E 99,621 17,787 (11,341) 106,067 (4,538) 101,529 (19,646) 81,883 0 (9,400) 0 0 11,341 83,824 59,761 83,824 143,585

Source: Company IFIN Research

Source: Company IFIN Research

IFIN Research

25 January 2012

Cairn India Ltd.

Disclaimer:
I-Fin Disclaimer: All information/opinion contained/expressed herein above by I-Fin has been based upon information available to the public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Neither I-Fin nor any of its employees shall be in any way responsible for the contents. Opinions expressed are subject to change without notice. This document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. This document is for the information of the addressees only and is not to be taken in substitution for the exercise of judgement by the addressees. All information contained herein above must be construed solely as statements of opinion of I-Fin at a particular point of time based on the information as mentioned above and I-Fin shall not be liable for any losses incurred by users from any use of this publication or its contents. Analyst declaration: I, Abhijeet Bora, hereby certify that the views expressed in this report are purely my views taken in an unbiased manner out of information available to the public and believing it to be reliable. No part of my compensation is or was or in future will be linked to specific view/s or recommendation(s) expressed by me in this research report. All the views expressed herewith are my personal views on all the aspects covered in this report. I-Fin Investment Rating: The ratings below have been prescribed on a potential returns basis with a timeline of up to 12 months. At times, the same may fall out of the price range due to market price movements and/or volatility in the short term. The same shall be reviewed from time to time by I-Fin. The addressee(s) decision to buy or sell a security should be based upon his/her personal investment objectives and should be made only after evaluating the stocks expected performance and associated risks. Key ratings: Rating BUY (B) Hold (H) SELL (S) Not Rated (NR) LARGE CAP Market Cap >= Rs 100 bn > 15% 5-15% < 5% Not initiated coverage on the stock MID CAP Market Cap < Rs 100 bn > 25% 10-25% < 8%

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