Cairn India Initiating coverage

1. First Insights
Cairn India Limited CMP Rs 287.1 PE 7.0x FY2013E Accumulate
We initiate coverage on Cairn India Limited (Cairn) as an Accumlate with an 18 month Price Objective of Rs 324
based on our net asset valuation methodology. At CMP of Rs 287.1, the stock is trading at a 13% discount to its
Net Asset Value at an oil price of $108 per barrel, representing a potential upside of ~12.7%. Our model factors in
the increased royalty and cess burden. Further the demand pull and supply shortages surrounding the oil
complex are compelling and support a higher price trajectory for crude oil in the medium and long term. This
augurs well for Cairn India. Further we believe that the worst has been factored into price and in our opinion
Vedanta is likely to share the royalty burden on a pro rata basis limiting the downside risks to the stock price.
PRICE TARGET Rs 324/- (15-18 Months) Worst factored in the price, limited downside at current valuations
Index Details
Sensex 17,166 Worst factored in price
Nifty 5,153 Despite good operational performance, a string of negative news flow on
BSE 500 6,646
Industry E&P
the corporate side and delays in approval of the Cairn- Vedanta deal has
Scrip Details led to the stock being beaten down to the current valuations. However we
Mkt Cap (Rs in crore) 54614 believe that the stock has reacted significantly from its intermediate high of
Book Value (Rs) 211.9 Rs 372 and all the negatives have been discounted in the price.
Eq Shares O/s (Cr) 190.3
Avg Vol (Lacs) 1.41
52 Week H/L 372/250
Royalty burden to impact bottom-line
Dividend Yield (%) 0.0 We expect, the Cairn Energy (62.2% stake) and Vedanta (18.7%), the
Face Value (Rs) 10.0 major share holders of Cairn India to accept to government riders to hasten
up the process of deal completion with Vedanta acquiring additional 40%
BSE Code 532792
NSE Code CAIRN
of the promoter stake in the company. The government has asked Cairn
India to accept royalty as cost recoverable which would mean sharing the
Shareholding Pattern (31st June, 2011) burden between the two partners effectively. Considering that, we have
factored in royalty burden of Rs 1978.8 crore and Rs 2593.0 crore for FY12
Shareholders % holding
Promoters 62.2 & FY13 respectively which would have a direct impact on the bottom-line of
Indian Institutions 7.3 the company.
FII’s 7.5
Non Promoter Corporate 20.3 Cess Payment to further erode value
Public 2.7
Total 100.0 In addition, government has asked Cairn India to withdraw arbitration
against cess payment. Cairn India would have to pay Rs 2,500 per tonne
Cairn India vs. Sensex cess on its 70% share in the Rajasthan Block. It would have an impact of
Rs 1352.3 crore and Rs 1949.3 crore in FY12 and FY13 respectively on
the bottom line of the company.
Valuations still hold attractive
Post acceptance of government riders, we expect the worst to be factored
in for the stock and arrive at a fair value of Rs 324 per share at Brent Oil
Price of USD 108 per barrel with major chunk of the value coming from the
Rajasthan fields at Rs 254 per share. The current value is at 13% discount
to the fair value of the company. Fluctuations in oil price would have upside
and downside risks to our target price impact of which has been quantified
in the later section of the report.
Key Financials (Rs in Cr)
Y/E Mar Net EBITDA PAT EPS EPS RONW ROCE P/E (X) EV/
(Rs Crore) Revenue Growth (%) (%) (%) EBITDA(X)
2010 1623.0 634.3 1051.1 5.5 17.4 3.1 2.8 52.0 83.3
2011E 10277.9 7663.4 6334.4 33.2 501.4 15.7 16.7 8.6 6.9
2012E 13659.5 8494.0 6335.5 33.3 0.3 13.6 14.6 8.6 6.2
2013E 17318.5 10554.1 7801.9 41.0 23.1 14.3 15.6 7.0 5.0
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This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

2. First Insights
Oil Fundamentals remain intact
With most of the large oil wells in decline state and no news flow on any
major discoveries being announced we expected the supply side to remain
curtailed. Coupled with the ever increasing demand for energy from the
populated developing countries we expect demand for energy to continue
to grow further straining the depleting supplies. This should ensure that oil
prices will remain elevated for the foreseeable future.
World Oil Supply and Demand
Source: Industry Sources and Ventura estimates
Major Oil producing countries production profile in a declining phase
Country Year Peak Production (bn bbl) 2010 Production (bn bbl) Decline Rate
US 1970 4.1 2.7 -1.0%
Mexico 2004 1.4 1.1 -0.6%
Argentina 1998 0.3 0.2 -0.6%
Colombia 1999 0.3 0.3 -0.1%
Venezuela 1998 1.4 0.9 -1.1%
Norway 2001 1.2 0.8 -1.1%
United Kingdom 1999 1.1 0.5 -2.0%
Uzbekistan 1998 0.1 0.0 -2.8%
Nigeria 2005 0.9 0.9 -0.1%
Australia 2000 0.3 0.2 -0.9%
Indonesia 1991 0.6 0.4 -1.3%
Egypt 1993 0.3 0.3 -0.3%
Libya 1970 1.2 0.6 -1.7%
Oman 2000 0.4 0.3 -0.6%
Syria 1995 0.2 0.1 -0.9%
Trinidad & Tabago 1978 0.1 0.1 -1.6%
Total 13.9 9.4
Source: BP Statistical Review of World Energy, 2011
This is extremely positive for Cairn and we estimate that for every $10 rise
in the price of oil to contribute Rs 32.6 to the NPV per share.
-2- Friday, 9th September, 2011
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3. First Insights
Sensitivity of NPV to oil price fluctuations
500 Our Best Case
450 Scenario
Fair price in Rs per share
400
350
300
250
200
150
100
50
0
80 90 100 108 110 120 130 140 150
Oil Price at $ per barrel
Fair Price Incremental
Source: Ventura estimates
Rajasthan Block- Key to future growth
Rajasthan Block- Key Producing asset
Currently Cairn is producing 1,25,000 bpd of crude from the Mangala fields
and post approval from its minority partner ONGC and DGH (Director
General of Hydrocarbon), it is expected to scale up to its production to
1,50,000 bpd. In addition to the Mangala field, the Bhagyam and
Aishwarya fields are also expected to come on-stream and achieve stable
production levels of 40,000 bpd and 10,000 bpd in Q4FY12 and H2FY13
respectively. Cumulatively the three fields are expected to produce
2,00,000 bpd of production which should cater to 20% of India’s total oil
output. With Cairn all committed to meet its production targets, approval
from the minority partner ONGC and DGH holds the key. We foresee no
further impediments to the smooth passage of the deal as Cairn Energy
and Vedanta are very likely to accept government riders for the approval of
the Cairn- Vedanta deal.
Gross Production Profile of MBA Asset
250.0
200.0
150.0
100.0
50.0
0.0
Gross prod. - MBA (000' bpd) Gross Prod MBA EOR ('000 bpd)
Source: Cairn & Ventura estimates
-3- Friday, 9th September, 2011
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

4. First Insights
Cairn’s Rajasthan fields have significant 2P resources
The total Proven and Probable (2P) reserves of the MBA fields is
estimated to be ~ 649 mn boe while 300 mnboe or more is recoverable
through EOR activity. Apart from the MBA fields, 22 other fields (including
the Barmer Hill Formation) have been estimated to hold approximately 1.9
bn boe of resources, out of which, the 2P recoverable resources is
estimated at 140 mnboe.
Cumulatively Cairn’s exploration resource potential is of 2.5 bn boe. We
expect the company to reach a production level of 190,000 bpd by FY13.
On the back of enhanced production, we expect the Rajasthan field to
contribute Rs 14,053.7 crore and Rs 20,258.1 crore to the revenue by
FY12 and FY13 respectively.
Matured Assets- Ravva & Cambay Fields have limited growth
opportunities and drilling to commence on Sri Lankan Block
Cairn Energy’s other assets; Ravva block (in KG Basin) and Cambay basin
are matured assets with its production pegged at 34,800 /31,400 bpd and
11,400 / 10,100 bpd of oil and oil equivalent in FY12 / FY13 respectively.
With production from these fields on a decline path, the assets have a
production life of 7-8 years and hence present truncated growth
opportunities.
Cairn Lanka with 100% Working Interest in the NOC block in Sri Lanka has
commenced its drilling plan in August 2011 and plans to dig 3 wells. Any
hydrocarbon discoveries from this block would provide further upside to the
stock. However we have not factored this in our valuations.
Asset Profile for Cairn Energy
Source: Cairn & Ventura Research estimates
-4- Friday, 9th September, 2011
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5. First Insights
Train- 4 and Extended Pipeline to enhance operational performance
and open export opportunities
To ease the transportation of crude oil from the Rajasthan Block to other
public and private refineries in India, Cairn energy has developed a
transportation system consisting of four trains and a pipeline. At present
the total operational capacity of the three operational trains is 30,000 bpd,
50,000 bpd and 50,000 bpd respectively. Train 4 with a capacity of 75,000
bpd is expected to be commissioned in H2CY11 and enhance total
capacity to 2,05,000 bpd.
In addition to the implementation of Train 4, Cairn is also undertaking
extension of the MPT Salaya pipeline to Bhogat which is expected to be
concluded in H2CY12 and will not only expand domestic reach to multiple
refineries but would also open up the possibilities for export.
Both these expansions are expected enhance sales while reducing
operational expenses significantly.
Key Concerns
• Further delays in the approval for ramp up of production in the
Rajasthan Fields from the minority partner ONGC and DGH would
lower the value of the stock.
• Volatility in Crude Oil Prices would have upside and downside
risks to our valuations.
-5- Friday, 9th September, 2011
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6. First Insights
Exhibit 01: Financials and Projections
Profit & Loss Statement Key Ratios
Y/E March, Fig in Rs. Cr FY2010 FY2011 FY2012e FY2013e Y/E March, Fig in Rs. Cr FY2010 FY2011 FY2012e FY2013e
Net Sales 1623.0 10277.9 13659.5 17318.5 Per Share Data (Rs)
% Chg. 13.0 533.3 32.9 26.8 EPS 5.5 33.2 33.3 41.0
Total Expenditure 988.7 2614.5 5165.5 6764.3 Cash EPS 5.6 36.5 41.1 52.1
% Chg. 0.0 164.4 97.6 31.0 DPS
EBIDTA 634.3 7663.4 8494.0 10554.1 Book Value 178.5 211.9 245.1 286.1
EBIDTA Margin % 39.1 74.6 62.2 60.9 Capital, Liquidity, Returns Ratio
Other Income 407.7 128.8 186.5 264.6 Debt / Equity (x) 0.1 0.1 0.1 0.0
PBIDT 1042.0 7792.2 8680.5 10818.7 Current Ratio (x) 1.5 2.7 3.9 4.5
Depreciation 10.9 611.3 1487.7 2107.1 ROE (%) 3.1 15.7 13.6 14.3
Interest 14.8 290.9 380.4 322.6 ROCE (%) 2.8 16.7 14.6 15.6
PBT 1016.3 6890.0 6812.4 8389.1 Dividend Yield (%) 0.0 0.0 0.0 0.0
Tax Provisions -34.8 555.6 476.9 587.2 Valuation Ratio (x)
Profit After Tax 1051.1 6334.4 6335.5 7801.9 P/E 52.0 8.6 8.6 7.0
Exceptional Items P/BV 1.6 1.4 1.2 1.0
Reported PAT 1051.1 6334.4 6335.5 7801.9 EV/Sales 32.5 5.1 3.9 3.0
PAT Margin (%) 64.8 61.6 46.4 45.0 EV/EBIDTA 83.3 6.9 6.2 5.0
Operational Exp / Sales (%) 26.2 14.8 30.0 31.3 Efficiency Ratio (x)
Employee Exp / Sales (%) 6.8 1.1 1.2 1.1 Inventory (days) 65.4 11.6 10.5 9.5
Other Mfr. Exp / Sales (%) 28.0 9.6 6.6 6.6 Debtors (days) 69.0 52.7 55.0 55.0
Tax Rate (%) -3.4 8.1 7.0 7.0 Creditors (days) 194.6 37.3 36.5 36.5
Balance Sheet Cash Flow Statement
Y/E March, Fig in Rs. Cr FY2010 FY2011 FY2012e FY2013e Y/E March, Fig in Rs. Cr FY2010 FY2011 FY2012e FY2013e
Share Capital 1897.0 1901.9 1902.5 1902.5 Profit After Tax 1051.1 6334.4 6335.5 7801.9
Stock options outstanding 46.4 55.5 55.5 55.5 Depreciation 10.9 611.3 1487.7 2107.1
Reserves & Surplus 31925.0 38335.8 44671.4 52473.2 Working Capital Changes -660.5 -761.4 -719.1 -292.5
Total Loans 3400.7 2678.2 2709.0 1562.4 Others -264.5 305.7 0.0 0.0
Net Deferred Tax Liability 445.3 561.2 561.2 561.2 Operating Cash Flow 137.0 6490.0 7104.1 9616.4
Total Liabilities 37714.4 43532.6 49899.6 56554.8 Capital Expenditure -3238.1 -2835.1 -2015.4 -3128.3
Gross Block 222.8 6653.9 7319.3 8197.7 Change in Investment -1541.1 618.0 -109.4 -120.4
Less: Acc. Depreciation 95.8 730.4 2218.1 4325.1 Cash Flow from Investing -4779.3 -2217.1 -2124.8 -3248.7
Net Block 127.0 5923.6 5101.3 3872.5 Proceeds from equity issue 0.3 4.9 0.6 0.0
Capital Work in Progress 9662.9 6066.8 7416.8 9666.8 Inc/(Dec) in Debt -955.7 -722.5 30.8 -1146.7
Goodwill 25319.3 25319.3 25319.3 25319.3 Dividend Paid
Investments 1712.4 1094.4 1203.9 1324.3 Cash Flow from Financing -955.4 -717.6 31.4 -1146.7
Net Current Assets 717.6 5034.3 10764.0 16277.6 Net Change in Cash -5597.6 3555.3 5010.7 5221.0
Miscellaneous Exp. 175.2 94.3 94.3 94.3 Opening Cash Balance 6527.1 929.4 4484.7 9495.4
Total Assets 37714.4 43532.6 49899.6 56554.8 Closing Cash Balance 929.4 4484.7 9495.4 14716.4
Ventura Securities Limited
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-6- Friday, 9th September, 2011
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.