Report Date

December 9, 2006.

Company Name

CAIRN INDIA LIMITED (CIL)

Price Band / Recommendation

Rs 160-190

Subscribe

Sector

Oil and Gas - Exploration & Production

Investment Rationale
 

Ø    CIL is 69.5% subsidiary (post issue) of Cairn Energy Plc, U.K. engaged in oil & gas exploration and production (core focus area being South Asia i.e. India, Bangladesh & Nepal). Currently, company operates 11 offshore platforms, ~ 200 Kms of sub-sea pipelines and 2 processing plants.

Ø    CIL has vast experience of exploring and operating development and production assets in India for over 12 years and that too at lower cost. Production cost at Ravva field in KG basin is less than US $ 1 per barrel.
 

Ø    Total gross proved plus probable (2P) reserves attributable to fields in production and under development in which CIL has interest is 754 million barrels of oil equivalent (mmboe) and CIL’s net working interest is estimated to be 472 mmboe. Most of these 2P reserves are estimated to be in Rajasthan block and remains to be tapped which will provide the transformational growth for CIL.
 

Ø    Thus, commercialization of Mangala field by 2009 and other fields in Rajasthan (CIL has 70% share) will augment CIL’s share of oil production to > 125,000 (21,500 at present) bopd over next 4-5 years. Then, CIL would be operating ~ 20% of total domestic production by 2010.   

Investment Concerns 

Ø   Ravva field to come off its plateau rate of 50,000 bopd in late 2007 at which point production will begin to decline.  
 

Ø     Production in Mangala field scheduled to start in 2009. Any delay (due to any reason) could affect the company adversely owing to cost overruns.
 

Ø    Waxy nature of oil reserves in Rajasthan presents flow concerns and need to be sold at discount to prevailing price.
 

Ø    CIL may have to cough up US $ 941 million as cess in relation to crude oil from Rajasthan block 

Recommendation 

Ø    On consolidated basis of Cairn Energy Australia Pty. Ltd (CEA), Cairn Energy Holdings BV (CEIH) and Cairn Energy Hydrocarbons Ltd (CEHL), net profit stood at Rs 92 crore as of December 31, 2005 (including one time gain of Rs 230 crore) while there was loss of Rs. 53 crore as of June 30, 2006. This does not provide meaningful basis of comparison and companies like CIL needs to be valued on the basis of projected earnings and cash flow from discovered reserves.
 

Ø    It should be noted that company has made private placement of 10% stake (post issue) at Rs. 176.48 to Petronas, Malaysian oil & gas giant.
 

Ø    Considering above mentioned things and the fact that earnings will materialise only after 2009, we recommend to SUBSCRIBE the issue from long term perspective with limited immediate upside.

BSE Sensex

13799.49

Issue Details

Issue Size *

32,87,99,675 Equity Shares

Shares offered to Public

32,87,99,675 Equity Shares

Shares reserved for Retail Investors

9,86,39,903 Equity Shares

Face Value

Rs 10/-

Funds to be raised

Rs 5,261-6,247 crore

Issue opens on

December 11, 2006

Issue closes on

December 15, 2006

Utilisation of Issue Proceeds

Particulars

Rs Crore

Development in the Rajasthan block and additional drilling activities in Ravva and Cambay blocks

5,525

Exploration & Appraisal activities

691

                              Shareholding Pattern (%) *

Pre Issue

Post Issue

Promoters – Cairn UK Holdings Ltd

100%

69.50%

Others

-

11.88%

Public

-

18.63%

Eq. Capital (Rs. Cr.) *

1436.52

1765.31

* Excluding Green shoe option of 49,319,951 shares.

About Cairn India
 

Ø       CIL was incorporated on August 21, 2006 and has had no independent operating history and the business comprising CIL will be acquired thru’ the acquisition of Cairn India Holdings Ltd (CIHL) -  an intermediate holding company which is a subsidiary of Cairn Energy Plc. – ultimate holding company. CIHL will own 27 subsidiaries thru’ which business of CIL is conducted.
 

Ø       As on June 30, 2006, ~ 98.9% of gross assets of the above subsidiaries were held directly or indirectly by Cairn Energy Australia Pty. Ltd (CEA), Cairn Energy Holdings BV (CEIH) and Cairn Energy Hydrocarbons Ltd (CEHL) – all 3 are subsidiaries of Cairn India Holdings Ltd. These also contributed 100% of the production of CIL.
 

Ø       CIL operates in the oil exploration, production & development space. Currently, CIL operates 11 offshore platforms, ~ 200 Kms of sub-sea pipelines and 2 processing plants. It has two producing assets, Ravva fields in KG basin (CIL stake of 22.5%) and Lakshmi & Gauri fields in Cambay Basin (CIL stake 40%). Company is the operator in both these producing assets. For 6 months ending June 2006, total gross production from these fields was ~ 87,500 boepd of which CIL’s share was 24,000 boepd.
 

Ø       CIL is the low cost operator of producing oil in India. Production cost at Ravva field is less than $1 per barrel whereas cost of producing oil from Mangala field in Rajasthan will be around $3.5-4 per barrel and after considering other cost; it will be around $ 9-10 per barrel.

Investment Rationale 

Ø       Total gross proved plus probable (2P) reserves attributable to fields in production and under development in which CIL has interest is 754 million barrels of oil equivalent (mmboe) and CIL’s net working interest is estimated to be 472 mmboe. Most of these 2P reserves are estimated to be in Rajasthan block and remains to be tapped which will provide the transformational growth for CIL.
 

Ø       In 2004, CIL discovered Mangala oil field in Rajasthan, the largest oil discovery by any company in India. Since then, CIL made 18 additional discoveries in Rajasthan block, where it will have 70% working interest and rest will be held by ONGC. Assuming Indian production remains at current levels and production from Rajasthan Block’s Northern fields (Mamgala, Bhagyam, Aishwariya and Shakti) fulfills its target gross plateau production rate of ~ 150000 bopd, CIL would be operating ~ 20% of total domestic production by 2010.
 

Ø       In addition to 2P reserves, CIL has identified considerable contingent resources aggregating 413 mmboe of which Rajasthan block contributes 256 mmboe and 157 mmboe outside of Rajasthan block. Development of these resources will provide an opportunity to sustain and grow production.
 

Ø       Company has significant portfolio of exploration & appraisal acreage in eastern, western & northern fields. It had participated in NELP (New Exploration Licensing Policy) VI held in Aug. 2006. It holds interests in 10 blocks (under various stages of exploration) where currently there is no production or development. These blocks provide opportunities for the business to grow over the longer term.

Investment Concerns  

Ø       Ravva field is expected to come off its plateau rate of 50,000 bopd in late 2007 at which point production will begin to decline. However, company has started exploration studies and future development of new fields in Ravva will ensure existing plateau production rate.
 

Ø       Production in Mangala field is scheduled to start by 2009. Any delay (due to any reason) could affect company adversely owing to cost overruns.
 

Ø       No consensus / agreement have been reached yet on pipeline infrastructure needed for crude offtake from Mangala field. On this issue, MRPL, Government of India’s (GOI) nominee, has recently raised objection. Nevertheless, CIL is considering other options like negotiating with private players and even entering itself in construction of pipeline which will increase overall cost of project. Any delay in setting up pipeline will affect production from this field.
 

Ø       Waxy nature of crude oil at Northern fields in Rajasthan block presents flow concerns and will need to be sold at discount to then prevailing price.
 

Ø       CIL may have to cough up US $ 941 million as cess in relation to crude oil from Rajasthan block

Recommendation           

Ø       CIL was incorporated in 2006 & has no independent operating history and the business will be acquired thru the acquisition of Cairn India Holdings Ltd which owns 27 subsidiaries thru’ which the business of CIL is conducted.
 

Ø       On consolidated basis of CEA, CEH & CEIH, net profit stood at Rs 92 crore as of December 31, 2005 (including one time gain of Rs 230 crore) while there was loss of Rs 53 crore as of June 30, 2006. This does not provide meaningful basis of comparison and companies like companies like CIL needs to be valued on the basis of projected earnings and cash flow from discovered reserves.
 

Ø       It should be noted that company made Pre-IPO placement of 10% post issue equity @ Rs 176.48 to Petronas International, Merrill Lynch International, ABN AMRO Bank, Videocon Industries, Citigroup Global Markets Mauritius and Datavision Systems Pvt. Ltd which reinforces the fact that CIL will deliver to investors’ expectations in the long term.
 

Ø       Considering above mentioned things and the fact that earnings will materialise only after 2009, we recommend to “SUBSCRIBE” the issue from long term perspective with limited immediate upside.

Disclosures  

The author may have held / hold the above-mentioned securities in their personal accounts or on behalf of the clients. The information contained has been obtained from sources believed to be reliable. While taking utmost care in making the report, the authors or the company does not take responsibility for the consequences of the report. All investment, information and opinion are subject to change without notice. The investment recommendations may not be suitable to all the investors. 

December 9, 2006