Cairn India

CAIRN INDIA LIMITED RESEARCH

5

EQUITY RESEARCH

August 18, 2009

Cairn India Limited

RESULTS REVIEW

Hold

Q1’10 performance hit by one-time exceptional loss of Rs 1.6 bn

Share Data Market Cap

Rs. 453.21 bn

For Q1’10, Cairn India Limited’s (CIL’s) net revenues declined 49.2% yoy to

Rs. 238.95

Rs. 2,049.5 mn. This decline was largely due to a 15.2% yoy fall in the net

Price BSE Sensex

15,035.26

production per day and a 46.2% yoy decline in average price realisations

Reuters

CAIL.BO

Bloomberg

CAIR IN

(USD 51.2 per boe), partly offset by the depreciation of the rupee. Overall

1.03 mn

results have benefited from higher other income, which included income

Rs. 273.7 / 88.2

from investments of Rs 571 mn and forex gains of Rs 718 mn. In addition,

Avg. Volume (52 Week) 52-Week High/Low Shares Outstanding

1,897 mn

Valuation Ratios (Consolidated) Year to 31 December

However, the Company’s reported net profit fell 67.2% yoy to Rs. 454.7 mn 2010E

EPS (Rs.)

there was a write-back of deferred taxes to the extent of Rs. 418.6 mn.

2011E

5.2

21.3

+/- (%)

43.3%

309.4%

PER (x)

45.7x

11.2x

EV/ Sales (x)

23.7x

7.0x

EV/ EBITDA (x)

34.8x

9.6x

on account of an exceptional provision of Rs.1,637.1 mn for a past-profit petroleum payment pertaining to Ravva that was due to the GoI. The matter is currently under appeal in the higher court. Revised Mangala field development plan approved: GoI has approved the revised Mangala field development plan, which included an increased

Shareholding Pattern (%) Promoters

65

offtake of 125,000 bopd for Mangala, a higher processing capacity of

FIIs

11

205,000 bopd for the Mangala processing terminal, and a pipeline to

Institutions

6

Public & Others

18

Gujarat. Initial crude offtake volumes and pricing formula finalised: Commercial terms and pricing negotiations for the initial offtake of Rajasthan crude have

Relative Performance

been concluded with IOC and MRPL. As per the production-sharing 375

contract, pricing will be based on the comparable low sulphur crude,

325

frequently traded in the region - bonny light, with an appropriate discount to

275 225

Cairn’s waxy nature of crude. The implied price realisation would be at a

175 125

10-15% discount to Brent, on the basis of prices prevailing for the six Jul-09

Aug-09

Jun-09

May-09

Apr-09

Mar-09

Jan-09

Feb-09

Nov-08

CAIR IN

Dec-08

Oct-08

Sep-08

Aug-08

75

months ended June 2009, driven by the light-heavy spread. The pricing formula and offtake volumes will be subjected to revision post March 2011.

Rebased BSE Index

Key Figures (FY ended March) Q1'09 (Figures in Rs. mn, except per share data)

Q4'09

Q1'10

Net Sales EBITDAX Net Profit

4,036 2,721 1,386

1,818 867 187

2,050 1,321 455

67.4% 34.3%

47.7% 10.3%

64.5% 22.2%

0.73

0.10

0.24

YoY%

QoQ%

(49.2%) (51.4%) (67.2%)

12.8% 52.3% 143.4%

(67.2%)

143.4%

Margins(%) EBITDAX NPM Per Share Data (Rs.) Adj. EPS

Please see the end of the report for disclaimer and disclosures.

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CAIRN INDIA LIMITED RESEARCH

5

EQUITY RESEARCH

August 18, 2009 Initially, till the completion of the pipeline to Gujarat, oil will be trucked to the Gujarat coast and will be shipped to MRPL and HPCL. The sale of oil to IOC will be through the Company’s existing pipeline network in Gujarat. Production schedules on track: All facilities and logistics for trucking at Train 1 with capacity of 30,000 bpd are complete at both the Mangala processing terminal in Rajasthan and the receiving port at Kandla in Gujarat. The first production is set to start in August 2009. Train 2 of 50,000 bpd capacity is targeted for completion by the end of December 2009; Train 3 is progressing according to schedule to attain production of 50,000 bpd by H1’10. 28 wells have been drilled on the Mangala oil-field in the Rajasthan blocks so far, out of which 16 have been completed and are ready to start production. Exploration activities progressing aggressively: CIL continues to aggressively undertake exploration activities to increase the production of its gross reserve base from the current level of ~1 bn boe. The Company is planning further appraisal/exploratory drilling of up to three wells in 2009. One significant oil discovery was made in Raageshwari East resulting in a more than doubling of the size of the prospective resources in the Raageshwari area. The field development plan for the 822 sq km Kaameshwari West has been submitted to the Management Committee for approval. Preliminary work on 3D seismic surveys has commenced in Mannar (Sri Lanka) and Palar basins. Valuation We maintain a Hold rating for the stock based on our DCF-based net asset value at Rs. 250. Key Assumptions for arriving at the value include (i) company’s potential to grow its production volumes significantly in FY09FY14. The company currently reports net 695 mmboe of 2P reserves yielding an attractive RP ratio of 75 years based on the estimated production for FY’10 (ii) increase in price realisations to reflect the impact of the recent recovery in crude oil prices; we expect crude prices to hover at USD 70 -80/bbl in the near term. However, this is partly offset by a 15% discount on pricing (vs.10% assumed earlier) as per the revised pricing formula.

Please see the end of the report for disclaimer and disclosures.

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CAIRN INDIA LIMITED RESEARCH

5

EQUITY RESEARCH

August 18, 2009 Major risk factors that may hamper the achievement of the price target include i) unfavourable movement in oil and gas prices and ii) any adverse event like weather, regulatory factors, etc., which could impact oil production in Rajasthan. Result Highlights For the first quarter of the fiscal, CIL reported a decline in net sales, down 49.2% yoy to Rs. 2,049.5 mn, due to lower average price realisations and lower gross production volumes from its existing producing fields. Average Price Realisations by Quarter 87.4

95.2 73.3

Improved qoq price realisations; expected to increase further

58.4

68.1 47.1

50.5 42.3

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

51.2 42.4

Q4 09

Q1 10

Average price realisation plummeted by ~46.2% yoy to ~USD 51.2 per boe. However, on a qoq basis price realisation witnessed an improvement of ~20.8%, resulting in a 12.8% increase in sales. We expect the average price realisations to improve further in the coming quarters on the back of the recent recovery in the prices of crude oil. EBITDAX dropped to Rs. 1,321 mn as against Rs. 2,721 mn in Q1’09 on account of an increase in operating expenses, employee costs, and administrative expenses. However, EBITDAX improved 52.3% qoq and the EBITDAX margin climbed by 16.8 pts qoq to 64.5% on account of relatively lower administrative expenses and raw material cost of the Company, partly offset by a slight increase in the operating and employee costs. Exceptional loss Rs 1.6 bn impacts profitability

Reported net profit for the quarter stood at Rs. 454.7 mn, as against Rs. 1,385.8 mn in Q1’09, mainly on account of a one-time exceptional item of Rs. 1,637.1 mn for a past-profit petroleum payment pertaining to Ravva that was due to the GoI. Adjusted net profit, however, increased 50.9% yoy to Rs. 2,091.8 mn, mainly due to an increase in other income (up 123% yoy to Rs. 1,289.7 mn) and a deferred tax reversal. Cash (net of borrowing) available as at the end of June 2009 was Rs. 9,976 mn.

Please see the end of the report for disclaimer and disclosures.

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CAIRN INDIA LIMITED RESEARCH

5

EQUITY RESEARCH

August 18, 2009 Outlook

Production schedules on track to produce 175,000 bpd by H1’10

The growth prospects due to the increased production of CIL look attractive for a long-term investor. The Company is ready to start production of 30,000 bpd and raise it to 80,000 by the end of the year. By H1’10, the Mangala Processing Terminal (MPT) is expected to operate at its peak plateau capacity of 125,000 bpd. In addition, the Company expects to start production from Bhagyam and Aishwarya by 2011. After these projects become operational, the 175,000 boepd MBA fields will significantly boost CIL’s top-line. The smaller fields in Rajasthan Rageshwari and Saraswati could add another 10,000-15,000 bpd. In addition, the company 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 could possibly result in more discoveries. Key Figures 1 2 Year ending March* FY08 FY09 (Figures in Rs. mn, except per share data) Net Sales EBITDAX Net Profit

10,917 7,479 388

14,327 9,097 8,034

FY09

3

FY10E

FY11E

FY12E CAGR (%) 3

(FY09 -12E) 11,168 6,817 6,870

23,309 15,868 9,848

78,445 57,646 40,322

116,837 86,837 61,116

118.7% 133.5% 107.2%

Margins(%) EBITDAX NPM Per Share Data (Rs.) EPS PER (x)

68.5% 3.6%

63.5% 56.1%

61.0% 61.5%

68.1% 42.3%

73.5% 51.4%

74.3% 52.3%

0.0 NM

4.2 56.0x

3.6 65.4x

5.2 45.7x

21.3 11.2x

32.2 7.4x

* year ending changed from December to March 1. Pro-forma figures for April 2007 – March 2008 2. Pro-forma figures for January 2008 – March 2009 3. Pro-forma figures for April 2008 – March 2009

Please see the end of the report for disclaimer and disclosures.

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107.2%

5

EQUITY RESEARCH

CAIRN INDIA LIMITED RESEARCH August 18, 2009

Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

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