cairn india - edelweiss - may 2011

8/3/2019 Cairn India - Edelweiss - May 2011

1/12

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Over the past nine months, since Vedanta announced plans to acquire

majority stake in Cairn India (CAIR), shares of CAIR have moved sideways

while Brent is up 50%. Given the lackluster performance, the Catch-22

situation for investors is to either: (a) hold the stock from a long-term view ,

given the underlying high-quality asset base; or (b) quit, factoring in a steep

discount to SOTP that makes the stock unattractive. We have quantified the

impact of what-ifs and conclude that CAIRs shares will remain range-

bound in the near term, whilst continuing to offer upside in the long term.

Base case SOTP of INR 370/share

Our SOTP (end March 2012) stands at INR 370/share (10% upside from CMP),

underpinned by core asset value of INR 320/share and exploration upside of INR

50/share.

In a bear scenario, INR 63/share impact due to royalty, cess issueOur SOTP comes down by INR 63/share if royalty becomes cost-recoverable and

CAIR continues to pay INR 2,575 as cess.

Potential 10% discount to SOTP with Vedanta coming on board

Since 2005, Vedanta has, on an average, traded at a 20-25% discount to BHP

Billiton and Rio Tinto, but over the past three years the discount to BHP has

dipped to 9%. CAIR could trade at a discount of ~10% near term, in our view.

Gearing to oil price wrecked over past nine months

CAIR has typically seen a strong correlation with crude prices, but over the past

nine months, its shares have moved sideways even as Brent prices increased50%. We believe this disconnect will persist over the near term.

Bull case of INR 469/share remains attractive

Our bull case of INR 469/share is driven by: (a) gross production from the

Rajasthan block peaking at managements stated vision of 240 kb/d; (b)

incremental exploration upside of 150 mmboe from Sri Lanka and KG fields; and

(c) long-term oil price of USD 100/bbl.

Outlook and valuations: Balanced risk-reward; maintainHOLD

We maintain ourHOLDrecommendation and SOTP of INR 370/share on CAIR,

but lower the relative rating to Sector P erformerfrom Sector Outperformer

as uncertainties cloud the investment case for the near term.

India Equity Research | Oil, Gas and Services Company Update

CAIRN INDIA

Uncertainties cloud attractive long-term investment case

May 12, 2011

Reuters: CAIL.BO Bloomberg: CAIR IN

EDELWEISS 4D RATINGS

Absolute Rating HOLD

Rating Relative to Sector Performer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

Note:Please refer last page of the report for rating explanation

MARKET DATACMP : INR 336

52-week range (INR) : 372 / 266

Share in issue (mn) : 1,901.9

M cap (INR bn/USD mn) : 639 /14,280

Avg. Daily Vol. BSE/NSE (000) : 4,346.1

SHARE HOLDING PATTERN (%)

Promoters* : 62.2

MFs, FIs & Banks : 7.2

FIIs : 11.7

Others : 18.9

* Promoters pledged shares

(% of share in issue): NI

PRICE PERFORMANCE (%)

Stock Nifty EW O & G

Index

1 month (1.8) (3.8) 0.7

3 months 4.4 4.8 7.1

12 months 14.3 8.4 5.5

Niraj Mansingka, CFA

+91 22 6623 3315

[email protected]

Aditya Suresh

+91 22 4063 5478

[email protected]

Financials

Year to March FY09 FY10 FY11E FY12E

Net revenues (INR mn) 14,327 16,230 106,166 150,107

EBITDA (INR mn) 9,098 9,805 87,225 124,855

Net profit (INR mn) 8,035 10,511 62,008 95,235

Diluted EPS (INR) 4.2 5.5 32.4 49.8

Diluted P/E (x) 81.9 62.6 10.6 6.9

EV/EBITDA (x) 69.2 67.4 7.2 4.5

ROAE (%) 2.6 3.2 16.8 21.5


2/12

Edelweiss Securities Limited 2

Oil, Gas and Services

Base case SOTP of INR 370/share

On August 16, 2010, the Vedanta Group (Vedanta) announced plans to acquire 51-60%

stake in Cairn India (CAIR) from Cairn Energy Plc. (Cairn Energy), CAIRs majority

stakeholder, for a consideration of USD 8.59.6 bn in cash. As per the deal proposal,

minority shareholders would get INR 355/share, while Cairn Energy an additional INR

50/share as non-compete fee. We note that the deal was proposed at a time when Brent

was roughly ~USD 75-80/bbl versus the current ~USD 110/bbl. Structurally, we believe

that long-term oil price assumptions have moved up by USD 5-10/bbl.

Consensus fair value range for CAIR is between ~INR 290/share and INR 480/share.

Our fair value SOTP for CAIR stands at INR 370/ share, underpinned by core

asset value of INR 320/ share and exploration upside of INR 50/ share. However,

we believe that the stock will trade at ~10% discount to SOTP over the next 12 months

until there is clarity on: (a) cash deployment plans post the Vedanta transaction; and (b)

royalty payments.

Key assumptions in our base case

1) Rajasthan block

a. Production: Gross oil production ramps up to a peak of 210 kb/d by FY13 with 5

years of plateau production. Beyond FY18, we assumed a decline rate of 8%.

b. We assume royalty is not cost-recoverable.

c. Cess = INR 927/tonne from FY14 (versus current rate of INR 2,575/tonne),

basically implying the cess issue (currently under arbitration) is ruled in favour

of CAIR.

2) Other blocks

a. Ravva: Production decline stopped and plateau production of 31kb/d maintained

till FY15 due to a combination of horizontal and infill drilling.

b. KG-DWN-98/2: 7 tcf of gross recoverable reserves; production starts in FY17

3) Exploration upside: Risked net reserves = 375 mmboe; average NPV USD 6.3/boe.

4) Oil price: USD 90/bbl long-term; WACC: 11.0%; USD/I NR: 46.0.

Chart 1: CAIR bu ll-bear SOTP break-up

Source: Edelweiss research

271

370469

-2 -5 -10 -13-18

-5046 31

16 3 3

0

100

200

300

400

500

BearCase

Others

LowerKGBasinPdtn

LowerExplnupside

Cess=

INR2575/ton

USD80/bblOil

Royaltycost-

recovery

BaseCase

RajasthanRamp-Up

USD100/bblOil

HigherExplnUpside

RavvaPlateauExtn

HigherKGPdtn

BullCase

(INR/sh)


3/12


Cairn IndiaTable 1: CAIR bull-bear case SOTP valuations

Chart 2: INR 370/ share base case SOTP underpinned by Rajasthan block

Chart 3: Gross oil production profile from Rajasthan block


SOTP Valuation

Block NPV (INR mn) NPV (INR/share)NPV

(INR mn)

NPV

(INR/share)

NPV (INR

mn)

NPV

(INR/share)

RJ-ON-90/1 (Rajasthan) 471,317 247 616,362 323 317,777 167

KG-DWN-98/2 18,108 9 23,292 12 7,840 4

CB/OS-2 9,743 5 10,387 5 9,176 5

Ravva 15,630 8 23,689 12 10,437 5

Exploration upside 95,000 50 125,000 65 75,000 39

FY12 end net cash 96,588 51 96,588 51 96,588 51

Mar-12 SOTP fair value 706,386 370 895,317 469 516,818 271

CMP 336 336 336

% upside 10.2 39.6 (19.4)

Base case (USD 90/bbl) Bull case (USD 100/bbl) Bear case (USD 80/bbl)

370

247

50

9 8 5

51

0

80

160

240

320

400

Rajasthan

(peak

210kb/d)

Exploration

Upside

KGBasin

Ravva

Cambay

NetCash

BaseCase

BaseSOTP(INR/sh

)

0

50

100

150

200

250

FY08

FY10

FY12

FY14

FY16

FY18

FY20

FY22

FY24

FY26

FY28

FY30

GrossOilPdtn(kb/d)

Mangala Bhagyam Aishwaraya Rajasthan Others


4/12



Table 2: CAIR oil and gas reserve valuation summary


INR 63/share impact due to royalty and cess issue, in a bear scenario

To incentivise participation in the pre-NELP licensing rounds, govt. exempted private players

from paying royalty on oil produced from the fields, with the entire burden of these payments

falling on ONGC and OIL.

Royalty: We believe that as per the Production Sharing Contract (PSC), ONGC (with 30%

stake) is liable to pay full 20% royalty on oil produced from the RJ-ON-90/1 (Rajasthan)

block. However, ONGC believes that royalty payments should be cost recoverable - i.e.

include royalty payments as part of the project cost, which can later be recovered before

profits splitting - and is currently discussing its case with the govt. In case govt. makes

royalty payments cost-recoverable, our fair value SOTP comes down by INR 50/share.

Cess: The PSC terms do not explicitly require CAIR to pay any cess on the Rajasthan block.

However, on order of the Petroleum Ministry, CAIR, under protest, is paying cess of INR

2,575/tonne for oil produced from the block; the matter is currently under arbitration. In a

scenario where CAIR is required to pay cess of INR 2,575/tonne for the life of the field, our

fair value SOTP comes down by INR 13/share.

In our base case SOTP, we assume ONGC continues to pay full royalty and cess

payment comes down to INR 927/ tonne starting FY14 (assumed same as payment

currently made for Ravva).

Production Activity

Gas

(bcm)

Oil

(mmt)

O+OEG

(mtoe)

O+OEG

(bn boe)

NPV

(USD/boe)

NPV

(USD bn)

NPV

(INR bn)

NPV

(INR sh)

Ravva 0.7 2.4 3.0 0.0 17.5 0.4 16 8

KG-DWN-98/2 20.4 0.0 18.4 0.1 3.4 0.5 18 9

CB/OS-2 1.7 0.7 2.3 0.0 14.5 0.2 10 5

RJ-ON-90/1 (Rajasthan) 0.0 91.7 91.7 0.7 17.5 11.8 471 247

Total 22.9 94.8 115.4 0.8 52.9 12.9 515 270

Exploration & Appraisal Activity

Block

Gross

reserves

(mn boe)

Stake

(%)

Net

reserves

(mn boe)

Risk

(%)

Net

reserves

(mn boe)

NPV

(USD/boe)

NPV

(USD bn)

NPV

(INR

bn)

NPV

(INR sh)

RJ-ON-90/1 (Rajasthan) 1,900 70% 1,330 8% 100 10.0 1.0 40 21

Prospective resources (Rajasthan) 2,500 70% 1,750 10% 175 5.0 0.9 35 18

Exploration of other blocks 1,000 100% 1,000 10% 100 5.0 0.5 20 10

Total 2,900 80% 2,330 10% 375 6.3 2.4 95 50

Royalty cost-recoverable =SOTP comes down by INR50/share

Cess of INR 2,575/tonne forthe field life = SOTP comesdown by INR 13/share


5/12


Cairn India

Potential 10% discount to SOTP with Vedanta coming on board

Historically, we believe CAIR has traded at ~5-10% premium to SOTP due to its high-

quality asset base and leverage to crude prices. With likelihood of Vedanta coming on-

board, the key question is should CAIR trade at a discount to SOTP? Since 2005, Vedanta

has, on an average, traded at a 20-25% discount to BHP Billiton and Rio Tinto. However,

over the past three years, the discount to BHP Billiton has dipped to 9% (refer Chart 4).

We believe shares of CAIR could trade at a discount of ~10% to SOTP in the near term.

CAIR could potentially re-rate, if there is further clarity on: (a) capital redeployment

plans by Vedanta; and (b) ONGC continues to pay full royalty for the Rajasthan block.

Chart 4: Vedanta has traded at a 9% discount to BHP over the past three years


Gearing to oil price wrecked over past nine months

CAIR has typically seen a strong correlation with crude prices, but over the past nine

months its shares have moved sideways even as Brent prices increased 50%. We believe

this disconnect will persist for the same reasons as discussed above.

Chart 5: CAIRs high correlation w ith oil price w recked, following Vedantas acquisition plans


-100%

-50%

0%

50%

100%

150%

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

VedantaDisc/Prem

(EV/T12MEBITDA)

Vedanta vs BHP Vedanta vs RIO

0

50

100

150

200

250

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Prices

(rebasedJan2008)

Cairn India Brent

CAIR has historicaltraded at a premium

to Brent..

0

50

100

150

200

250

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

Price(rebasedAug16,10')

Cairn India Brent

.. but, the correlation iswrecked over last 9 months

CAIR could trade at 10%discount to NAV near term


6/12



Spelling out the upside case at CAIR (INR 469/share bull case SOTP)

In our bull case, we highlight a path to INR 469/share for CAIR, with gross production from

the Rajasthan block peaking at managements stated vision of 240 kb/d (versus 210 kb/d in

the base case). To reach 240 kb/d peak production, we have assumed incremental

cumulative capex of USD 130 mn versus the base case. Key issues: (a) ONGC allowing

further production ramp-ups in Rajasthan, while having to pay full royalty; and (b) post

acquisition capital allocation plans of Vedanta.

Table 3: Drilling plan summary in FY12/ 13

Source: Company Reports, Edelweiss research

1. Barmer Hill (1.9 bn boe gross STOIIP, RJ-ON-90/1)

CAIR has characterised its acreage in Barmer Hill as highly prospective, with estimated

gross STOIIP (stock tank initial oil in place) of 1.9 bn boe. With recovery rates in

analogous fields averaging between 7% and 20%, the company estimates gross

recoverable resource of 140mmboe (~20% of current 2P reserves in Rajasthan). On its

part, CAIR has submitted a declaration of commerciality for the prospect. It is currently

drafting a pilot well test plan and intends to exploit the resources in the field in a staged

manner.

2. Ravva fields (horizontal and infill dril ling to extend plateau)

Following two consecutive years of production decline in Ravva fields (current production

~30 kb/d from a 10-year plateau of ~50kb/d), the company has started to employ a

combination of infill and horizontal drilling to enhance and extend the plateau of the field.

In our base case, we assume CAIR successfully arresting the production decline and

maintaining a plateau rate of 31kb/d for the next six years by incurring incremental

capex of USD 200 mn.

3. Further upside from Enhanced oil recovery

To maximise oil production from the existing Rajasthan discoveries, CAIR has started to

implement proven Enhanced Oil Recovery (EOR) methods, with the pilot stage involving

drilling of 10 wells in the Mangala field. The stated potential for the EOR plan is a)

increase 2P reserves by 300mmboe and b) extend the plateau production (currentplateau assumed at four years). In the Q3FY11 conference call, management highlighted

that eight wells had already been drilled and were in the water injection

phase. Management added that subject to necessary govt. approvals, the company

would implement EOR across the entire Rajasthan block starting 2013.

4. Wild cards: (a) Sri Lanka remains an unexplored frontier play with a three-well drilling

plan set to commence in July 2011; (b) KG-DWN-98/2 material discovery made in

UD1 well; ONGC is yet to submit FDP; (c) KG-ONN 2003/1 high quality

Nagayalanka-1Z discovery; appraisal drilling to commence in FY12.

Block LocationOn/Off

ShoreOperator

Working

InterestDrilling plan

RJ-ON-90/1 Barmer Hill (Rajasthan) Onshore Cairn 70% Pilot plans drafted

SL-2007-01-001 Sri Lanka (Mannar Basin) Offshore Cairn 100%6-month drilling program to commence by

July 2011; 3 wells planned

PKGM-1 Ravva Offshore Cairn 23% Horizontal and infill drilling commenced

KG-ONN-2003/1 KG Basin Onshore Cairn 49%Nagayalanka-1Z discovered; E&A by end

2011

Bull case of INR 469/share,primarily driven byRajasthan blocks rampingup to 240kb/d peak

production


7/12


Cairn India

Sensitivity analysis

We flex our fair value SOTP to four key factors: (a) crude price; (b) Rajasthan gross oil

production levels; (c) WACC; and d) USD/INR. Key takeaway: For every USD 1/bbl

increase in crude price, CAIRs SOTP increases by INR 2.6/ share.

Chart 6: SOTP impac t


Table 4: CAIR SOTP sensitivity analysis


+3.2

+2.6

+1.3

0.0

0.8

1.6

2.4

3.2

4.0

1% rupee deprn +$1/bbl crude -10bps WACC

SOTPimpact(INR/sh)

150 kb/d 180kb/d 210 kb/d 240kb/d 270kb/d

USD 70/ bbl 261 290 318 337 351

USD 80/ bbl 281 313 345 366 380

USD 90/ bbl 299 335 370 393 409

USD 100/ bbl 318 357 396 420 437

USD 110/ bbl 336 379 421 448 465

9% 10% 11% 12% 13%

USD 70/ bbl 341 329 318 308 299

USD 80/ bbl 371 357 345 333 323

USD 90/ bbl 400 384 370 357 346

USD 100/ bbl 428 411 396 382 369

USD 110/ bbl 457 438 421 406 392

9% 10% 11% 12% 13%

42.0 377 363 350 338 328

44.0 388 373 360 348 337

46.0 400 384 370 357 346

48.0 411 395 380 367 355

50.0 422 406 391 377 364

BrentLT

price

WACC

Rajasthan Gross Production

BrentLT

price

WACC

USD/INR


8/12



Financial Statements

Income statement (INR mn)

Year to March FY09 FY10 FY11E FY12E FY13E

Net revenue 14,327 16,230 106,166 150,107 173,953

Increase/decrease in stocks 222 (366) - - -

Lifting costs 1,075 2,782 6,489 8,369 10,462

Production expenses 2,130 4,248 16,688 22,927 18,051

Employee costs 1,145 1,441 1,118 1,157 1,197

Statutory levies 1,054 1,466 10,199 14,558 7,589

Other Expenses 1,732 1,102 1,135 1,169 1,204

Total operating expenses 5,007 6,791 18,941 25,252 20,452

EBITDA 9,098 9,805 87,225 124,855 153,502

Recouped cost 4,382 3,570 11,071 9,205 18,459

EBIT 4,716 6,235 76,154 115,650 135,043

Other income 5,945 4,077 1,735 3,580 6,680

Foreign exchange gain/(loss) (717) - - - -

Interest expenses 64 148 2,880 1,650 1,350Profit before tax 9,879 10,163 75,008 117,580 140,373

Provision for tax 1,844 (348) 13,000 22,344 26,676

Current taxes 1,111 2,216 15,000 22,344 26,676

Deferred taxes 623 (1,087) 1,500 - -

Fringe tax benefit 110 (1,477) (3,500) - -

Core profit 8,035 10,511 62,008 95,235 113,697

Profit After Tax 8,035 10,511 62,008 95,235 113,697

Profit after minority interest 8,035 10,511 62,008 95,235 113,697

Basic shares outstanding (mn) 1,897 1,897 1,908 1,914 1,914

Basic EPS (INR) 4.2 5.5 32.5 49.8 59.4

Diluted equity shares (mn) 1,914 1,914 1,914 1,914 1,914

Diluted EPS (INR) 4.2 5.5 32.4 49.8 59.4

CEPS (INR) 6.9 6.9 39.1 54.6 69.0

Dividend per share (INR) - - 1.6 5.0 8.9

Common size metrics - as % of net


Direct Cost 14.9 26.2 15.7 15.3 10.4

Other expenses 12.1 6.8 1.1 0.8 0.7

Depreciation 30.6 22.0 10.4 6.1 10.6

Interest expenditure 0.4 0.9 2.7 1.1 0.8

EBITDA margins 63.5 60.4 82.2 83.2 88.2

Net profit margins 56.1 64.8 58.4 63.4 65.4

Growth ratios (% )Year to March FY09 FY10 FY11E FY12E FY13E

Revenues 41.5 13.3 554.1 41.4 15.9

EBITDA 36.4 7.8 789.6 43.1 22.9

PBT 684.5 2.9 638.0 56.8 19.4

Net profit (3,373.6) 30.8 489.9 53.6 19.4

EPS (3,178.4) 30.8 489.9 53.6 19.4


9/12


Cairn India

Balance sheet (INR mn)

As on 31st March FY09 FY10 FY11E FY12E FY13E

Equity capital 18,967 18,970 19,084 19,142 19,142

Reserves & surplus 308,668 319,250 379,468 466,325 562,967

Shareholders funds 328,023 338,683 398,552 485,466 582,109Secured loans 222 34,007 30,000 25,000 20,000

Unsecured loans 43,342 - - - -

Borrowings 43,564 34,007 30,000 25,000 20,000

Deferred tax liability 5,540 4,453 6,119 6,119 6,119

Sources of funds 377,128 377,144 434,671 516,586 608,228

Gross block 260,277 261,791 289,292 319,077 328,737

Depreciation 3,437 2,335 11,906 21,110 39,069

Net block 256,839 259,457 277,387 297,967 289,668

Capital work in progress 62,027 91,635 94,335 98,732 106,915

Total fixed assets 318,867 351,092 371,721 396,699 396,583

Investments 1,713 17,124 5,000 5,000 5,000

Inventories 1,683 2,909 12,740 18,013 20,874

Sundry debtors 1,516 3,067 14,863 21,015 24,353

Cash and equivalents 65,271 9,294 55,320 113,674 210,312

Loans and advances 3,505 8,318 47,775 67,548 78,279

Other current assets 704 145 1,380 1,951 2,261

Total current assets 72,680 23,734 132,078 222,201 336,080

Sundry creditors and others 11,794 9,869 47,775 67,548 78,279

Others current liabilities 4,337 4,937 26,353 39,767 51,156

Total current liabilities & provisions 16,132 14,806 74,127 107,315 129,435

Net current assets 56,548 8,928 57,950 114,886 206,645

Uses of funds 377,128 377,144 434,671 516,586 608,228

Book value per share (INR) 162.9 168.5 198.8 243.6 294.1

Free cash flow (INR mn)Year to March FY09 FY10 FY11E FY12E FY13E

Net profit 8,035 10,511 62,008 95,235 113,697

Depreciation 4,382 3,570 11,071 9,205 18,459

Deferred tax 623 (1,087) 1,500 - -

Others (6,251) (3,762) (188) (1,930) (5,830)

Gross cash flow 6,789 9,232 74,391 102,510 126,326

Less: Changes in WC 7,566 (8,357) (2,997) 1,418 4,879

Operating cash flow 14,355 876 71,394 103,928 131,205

Less: Capex (37,052) (31,122) (30,201) (34,183) (17,843)

Free cash flow (22,697) (30,247) 41,194 69,746 113,362

Cash flow metrics


Operating cash flow 14,355 876 71,394 103,928 131,205

Investing cash flow (30,118) (44,173) (16,342) (30,603) (11,163)

Financing cash flow 66,564 (9,631) (9,027) (14,971) (23,405)

Net cash flow 50,802 (52,928) 46,025 58,355 96,638

Capex (37,052) (31,122) (30,201) (34,183) (17,843)

Dividends paid - - (3,100) (9,524) (17,055)

Share issuance/(buyback) 26,189 74 961 1,202 -


10/12

Edelweiss Securities Limited


Profitability & efficiency ratios


EBITDA margin (%) 63.5 60.4 82.2 83.2 88.2

ROAE (%) 2.6 3.2 16.8 21.5 21.3

ROACE (%) 1.4 1.7 19.3 24.6 24.2ROA 2.4 2.8 15.3 20.0 20.2

Receivable turnover (x) 10.0 7.1 11.8 8.4 7.7

Inventory turnover (x) 8.5 5.6 8.3 8.3 8.3

Payables turnover (x) 1.2 1.6 2.2 2.2 2.2

Inventory day 43 65 44 44 44

Debtors days 36 52 31 44 48

Payable days 300 222 164 164 164

Cash conversion cycle (days) (221) (105) (90) (77) (73)

Current ratio 4.5 1.6 1.8 2.1 2.6

Quick ratio 4.4 1.4 1.6 1.9 2.4

Cash ratio 4.0 0.6 0.7 1.1 1.6

Debt/EBITDA 4.8 3.5 0.3 0.2 0.1

Debt/Equity 0.1 0.1 0.1 0.1 -

Adjusted debt/equity 0.1 0.1 0.1 0.1 -

Interest coverage 73.6 42.1 26.4 70.1 100.0

Long term debt / Capital employed (%) 11.6 9.0 6.9 4.8 3.3

Total debt / Capital employed (%) 11.6 9.0 6.9 4.8 3.3

Operating ratios


Total asset turnover - - 0.3 0.3 0.3

Fixed asset turnover 0.1 0.1 0.4 0.5 0.6

Equity turnover - - 0.3 0.3 0.3

Du pont analysisYear to March FY09 FY10 FY11E FY12E FY13E

NP margin (%) 56.1 64.8 58.4 63.4 65.4

Total assets turnover - - 0.3 0.3 0.3

Leverage multiplier 1.1 1.1 1.1 1.1 1.1

ROAE (%) 2.6 3.2 16.8 21.5 21.3

Valuation parameters


Diluted EPS (INR) 4.2 5.5 32.4 49.8 59.4

Y-o-Y growth (%) (3,178.4) 30.8 489.9 53.6 19.4

CEPS (INR) 6.9 6.9 39.1 54.6 69.0

Diluted PE (x) 80.0 61.1 10.4 6.7 5.7

Price/BV (x) 2.1 2.0 1.7 1.4 1.1

EV/Sales (x) 43.9 40.7 5.9 3.8 2.7

EV/EBITDA (x) 67.4 65.7 7.0 4.4 2.9

EV/EBITDA (x)+1 yr forward 64.2 7.6 5.0 3.7 4.3

Dividend yield (%) - - 0.5 1.5 2.7

Basic EPS 4.2 5.5 32.5 49.8 59.4

Basic P/E (x) 79.3 60.6 10.3 6.7 5.7


11/12


11

Cairn India

Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Aban Offshore HOLD SU H Bharat Petroleum

Corporation

REDUCE SU M

Cairn India HOLD SP M Chennai Petroleum

Corporation

HOLD SP H

Essar Oil BUY SO H GAIL (INDIA) BUY SO L

Hindustan Petroleum

Corporation

REDUCE SU L Indian Oil Corporation HOLD SP M

Indraprastha Gas BUY SO L ONGC BUY SP L

Petronet LNG BUY SO L Reliance Industries BUY SO M

Shiv Vani Oil & Gas

Exploration Service

BUY SO M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings CriteriaSector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


12/12



Edelweiss Research is also available onwww.edelresearch.com

Bloomberg EDEL Thomson First Call Reuters and Factset Edelweiss Securities Limited

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage g roup( s ) o f s t ocks by p r i mary ana l yst ( s ) : Oi l ,Gas and Serv icesAban Offshore, Bharat Petroleum Corporation, Cairn India, Essar Oil, GAIL (INDIA), Hindustan Petroleum Corporation, Indraprastha Gas,Indian Oil Corporation, Chennai Petroleum Corporation, ONGC, Petronet LNG, Reliance Industries, Shiv Vani Oil & Gas Exploration Service

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 118 51 17 189* 3 stocks under review

Market Cap (INR) 111 61 17

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

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investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment bankingactivities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any

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