2QFY2013 Result Update Oil & Gas October 22, 2012 Cairn India Performance Highlights Quarterly highlights (Consolidated) Y/E March (` cr) 2QFY2013 2QFY2012 % chg (yoy) 1QFY2013 % chg (qoq) Net sales 4,443 2,652 67.5 4,440 0.1 EBITDA 3,452 2,104 64.0 3,492 (1.2) EBITDA margin (%) 77.7 79.3 (165)bp 78.7 (97)bp Adjusted PAT 3,108 232 1,240 2,960 5.0 For 2QFY2013, Cairn India (CIL) reported strong operating performance due to higher sales volumes and rupee depreciation. We maintain our Accumulate rating on the stock. Higher volumes and rupee depreciation drive CIL s top-line growth: CIL s top-line increased by a strong 67.5% yoy to `4,443cr (in line with our expectation of `4,418cr) led by higher crude oil sales volumes and rupee depreciation. During the quarter, CIL s working interest production volumes stood at 129,431boepd vs 99,220boepd in 2QFY2012 and 127,226boepd in 1QFY2013. Although the gross crude oil realization decreased by 4.6% yoy and 2.9% qoq to US$98.1/bbl, the realization in rupee terms was higher yoy due to INR depreciation against the USD in 2QFY2013 compared to 2QFY2012. Forex loss drags reported PAT: The operating margin contracted by 165bp yoy to 77.7% due to increase in cess and profit petroleum. Its operating profit grew by 64.0% yoy to `3,452cr. The company recorded an exceptional loss of `786cr on account of forex fluctuation during 2QFY2013. Excluding this exceptional loss, the adjusted net profit grew by 1,239.7% yoy to `3,108cr (above our estimate of `2,807cr). The reported net profit grew by 204.3% yoy to `2,322cr. Outlook and valuation: CIL has the infrastructure in place to ramp up production to meet its targets. Hence, we expect production to gradually increase in the coming quarters to reach a capacity of 205kbopd by FY2014. Further, there are various untapped exploratory upsides in Barmer Hills and other fields waiting to be developed. Hence, we recommend an Accumulate rating on the stock with a SOTP-based target price of `382. Key financials (Consolidated) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E Net sales 10,278 11,861 17,567 17,643 % chg 533.3 15.4 48.1 0.4 Net profit 6,334 7,938 11,652 10,837 % chg 502.6 25.3 46.8 (7.0) OPM (%) 80.3 78.0 76.2 72.3 EPS (`) 33.3 42.2 61.1 56.8 P/E (x) 10.1 8.0 5.5 5.9 P/BV (x) 1.6 1.3 1.1 0.9 RoE (%) 17.1 17.9 21.5 16.6 RoCE (%) 17.1 16.3 21.0 16.2 EV/Sales (x) 6.1 4.8 2.7 2.2 EV/EBITDA (x) 7.6 6.2 3.5 3.0 ACCUMULATE CMP Target Price Investment Period Bloomberg Code `338 `382 12 Months Stock Info Sector Market Cap (` cr) Oil & Gas 64,504 Net Debt (` cr) (7,014) Beta 0.9 52 Week High / Low 401/285 Avg. Daily Volume 758,135 Face Value (`) 10 BSE Sensex 18,793 Nifty 5,717 Reuters Code CAIR.BO CAIR@IN Shareholding Pattern (%) Promoters 58.8 MF / Banks / Indian Fls 9.0 FII / NRIs / OCBs 16.3 Indian Public / Others 16.0 Abs. (%) 3m 1yr 3yr Sensex 9.5 12.0 11.8 Cairn India 3.3 16.8 18.5 Bhavesh Chauhan Tel: 022-3935 7800 Ext: 6821 Bhaveshu.chauhan@angelbroking.com Vinay Rachh Tel: 022-39357800 Ext: 6841 Vinay.rachh@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 2QFY2013 financial performance (` Cr.) 2QFY2013 2QFY2012 % chg (yoy) 1QFY2013 % chg (qoq) 1HFY13 1HFY12 % chg (yoy) Net Operating Income 4,443 2,652 67.5 4,440 0.1 7,095 8,153 (13.0) operating expenditure 991 548 80.9 948 4.6 1,540 1,373 12.1 EBITDA 3,452 2,104 64.0 3,492 (1.2) 5,556 6,667 (16.7) EBITDA Margin (%) 77.7 79.3 78.7 78.3 81.8 Other Income 223 62 259.2 96 130.8 285 149 90.7 Interest 19 123 (84.7) 29 (36.0) 142 74 91.4 Forex gain/(loss) (786) (531) 866 (1,317) 867 PBT 2,392 866 176.2 3,953 (39.5) 3,258 6,771 (51.9) PBT Margin (%) 53.8 32.6 89.0 45.9 83.0 Total Tax 70 103 (32.3) 127 (45.2) 173 218 (20.8) % of PBT 2.9 11.9 3.2 5.3 3.2 PAT 2,322 763 204.3 3,826 (39.3) 3,085 6,553 (52.9) Minority interest - - Adj. PAT 3,108 232 1239.7 2,960 5.0 3,340 5,686 (41.3) PAT Margin (%) 70.0 8.7 66.7 47.1 69.7 Exhibit 2: 2QFY2013 Actual vs Estimates (` cr) Actual Estimates Variation (%) Net sales 4,443 4,418 0.6 EBITDA 3,452 3,495 (1.2) EBITDA margin (%) 77.7 79.1 (142)bp PAT 3,108 2,807 10.7 Higher volumes and rupee depreciation drive CIL s top-line growth: CIL s topline increased by a robust 67.5% yoy to `4,443cr (in line with our expectation of `4,418cr) led by higher crude oil sales volumes and rupee depreciation. During the quarter, CIL s working interest production volumes stood at 129,431boepd vs 99,220boepd in 2QFY2012 and 127,226boepd in 1QFY2013. Although gross crude oil realization decreased by 4.6% yoy and 2.9% qoq to US$98.1/bbl, the realization in rupee terms was higher yoy due to depreciation of rupee in 2QFY2013 as compared to 2QFY2012. October 22, 2012 2
Exhibit 3: Net sales increased by 67.5% yoy 5,000 4,500 4,000 3,500 3,000 427.5 3,654 3,713 341.7 2,652 3,097 3,651 4,440 4,443 450 400 350 300 250 (` cr) 2,500 2,000 200 150 (%) 1,500 67.5 100 1,000 500 - (1.3) 0.0 19.6 (0.1) 50 0-50 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Net sales Net sales growth (RHS) Operating margin contracts by 165bp yoy: The operating margin contracted by 165bp yoy to 77.7% due to increase in cess and profit petroleum. Its operating profit grew by 64.0% yoy to `3,452cr. Exhibit 4: Operating margin stood at 77.7% (` cr) 4,000 3,500 3,000 2,500 2,000 1,500 85.9 85.5 79.3 82.2 81.6 78.7 77.7 90 80 70 60 (%) 1,000 500 50-4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Operating profit Operating margin (RHS) 40 Forex loss drags reported PAT: The company recorded an exceptional loss of `786cr on account of forex fluctuation during 2QFY2013. Excluding this exceptional loss, the adjusted net profit grew by 1,239.7% yoy to `3,108cr (above our estimate of `2,807cr). The reported net profit grew by 204.3% yoy to `2,322cr. October 22, 2012 3
Exhibit 5: Adjusted PAT stood at `3,108cr (` cr) 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 2,515 2,727 232 1,960 2,403 2,960 3,108 1,400 1,200 1,000 800 600 400 200 0 (%) - (200) 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Adjusted PAT PAT growth (RHS) Investment arguments CIL aims to increase production to 240kbopd by CY2013 CIL commenced production from Bhagyam oil field during 4QFY2012 and produced 25kbopd during 1QFY2013. It aims to gradually increase its capacity at Bhagyam to 40kbopd. CIL also aims to reach its total exit capacity of 240kbopd by CY2013-end. Exploratory upsides awaited There are various untapped exploratory upsides in Barmer Hills and other fields waiting to be developed and commercialized. Currently, various schemes related to exploratory drillings and optimization of producing fields are awaiting approvals from the government. CIL had recently announced two discoveries in Mannar Basin, Sri Lanka. Outlook and valuation CIL has the infrastructure in place to ramp up production to meet its targets. Hence, we expect production to gradually increase in the coming quarters to reach a capacity of 205kbopd by FY2014. Further, there are various untapped exploratory upsides in Barmer Hills and other fields waiting to be developed. Hence, we recommend our accumulate rating on the stock with a target price of `382. October 22, 2012 4
Exhibit 6: SOTP valuation (FY2014E) Particulars (` cr) `/share MBA (DCF) 304 Ravva and Cambay basin (EV/boe 11x) 9 Barmer Hills (EV/boe 8x 50% discount to MBA) 11 Other exploratory upsides (EV/boe 4x 75% discount to MBA) 46 Total EV 370 Net debt (12) Equity value (`) 382 Exhibit 7: Key operating assumptions Particulars FY2013E FY2014E Total Rajasthan Production (kboepd) 175 205 Opex Rajasthan (US$/bbl) 2.8 2.8 Exhibit 8: Angel EPS forecast vs consensus Angel Forecast Bloomberg Consensus Variation (%) FY2013E 61.1 54.84 11.4 FY2014E 56.8 50.87 11.7 Exhibit 9: Recommendation summary Company CMP TP Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) (`) (`) (` cr) (%) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E RIL 815 - Neutral 261,155-13.7 13.0 1.3 1.2 8.6 7.9 11.0 10.6 7.4 7.7 ONGC 278 312 Accum. 236,987 12 9.1 8.7 1.5 1.4 4.0 3.7 18.3 17.2 19.3 18.4 CIL 338 382 Accum. 64,504 13 5.5 5.9 1.1 1.0 3.7 3.3 22.0 17.5 21.4 17.1 GAIL 359 - Neutral 45,259-10.7 10.4 1.9 1.7 5.5 4.6 18.9 17.0 23.5 20.7 Source: Angel Research Company background: Cairn India is an oil and gas exploration and production companies in India with interests in 11 blocks. The company estimates its Rajasthan block potential resource at ~6.5bboe with resource in Mangala, Bhagyam, Aishwarya (MBA) and other fields at ~4.0bboe. MBA fields hold resource of 2.1bboe, of which 2P reserves are over 1.0bboe. The company operates the largest oil-producing field in the Indian private sector. The company has pioneered the use of cutting-edge technology in India to extend production life. Cairn India is working closely alongside the central and state governments and has operational partnership with ONGC, Videocon, Tata, Marubeni and ENI. During FY2012, Vedanta acquired a majority stake (59%) in Cairn India. October 22, 2012 5
Profit & Loss Statement (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E Gross sales 1,623 10,278 11,861 17,567 17,643 Less: Excise duty - - - - - Net Sales 1,623 10,278 11,861 17,567 17,643 Other operating income - - - - - Total operating income 1,623 10,278 11,861 17,567 17,643 % chg 13.3 533.3 15.4 48.1 0.4 Total Expenditure 643 2,024 2,606 4,183 4,881 EBITDA 981 8,254 9,254 13,385 12,763 % chg 7.8 741.8 12.1 44.6 (4.6) (% of Net Sales) 60.4 80.3 78.0 76.2 72.3 Total Recouped cost 357 1,193 1,440 1,484 1,750 EBIT 623 7,061 7,814 11,901 11,013 % chg 32.2 1032.6 10.7 52.3 (7.5) (% of Net Sales) 38.4 68.7 65.9 67.7 62.4 Interest & other Charges 29 300 226 131 109 Other Income 422 129 938 664 667 (% of PBT) 41.6 1.9 11.0 5.3 5.8 Share in profit of Associates - - - - - Recurring PBT 1,016 6,890 8,526 12,434 11,571 % chg 4.5 577.9 23.8 45.8 (6.9) Extraordinary Expense/(Inc.) - - (103) - - PBT (reported) 1,016 6,890 8,629 12,434 11,571 Tax (35) 556 691 782 734 (% of PBT) (3.4) 8.1 8.0 6.3 6.3 PAT (reported) 1,051 6,334 7,938 11,652 10,837 Add: Share of earnings of asso. - - - - - Less: Minority interest (MI) - - - - - Prior period items - - - - - PAT after MI (reported) 1,051 6,334 7,938 11,652 10,837 ADJ. PAT 1,051 6,334 8,041 11,652 10,837 % chg 33.4 502.6 26.9 44.9 (7.0) (% of Net Sales) 64.8 61.6 67.8 66.3 61.4 Basic EPS (`) 5.4 33.3 42.2 61.1 56.8 Fully Diluted EPS (`) 5.4 33.3 42.2 61.1 56.8 % chg 32.9 515.8 26.6 44.9 (7.0) October 22, 2012 6
Balance Sheet (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E SOURCES OF FUNDS Equity Share Capital 1,943 1,902 1,907 1,907 1,907 Preference Capital - - - - - Reserves& Surplus 31,925 38,391 46,385 55,706 64,376 Shareholders Funds 33,868 40,293 48,292 57,669 66,339 Minority Interest - - - - - Total Loans 3,401 2,674 - - - Deferred Tax Liability 445 575 684 684 684 Long Term Provisions - 1,371 1,874 1,818 1,818 Total Liabilities 37,714 44,913 50,850 60,171 68,841 APPLICATION OF FUNDS Gross Block 722 6,670 7,363 12,383 17,383 Less: Acc. Depreciation 96 747 1,434 2,918 4,668 Net Block 626 5,924 5,929 9,465 12,715 Capital Work-in-Progress 9,163 3,982 4,500 3,500 2,000 Cost of Producing facility - 2,085 3,021 3,021 3,021 Goodwill 25,319 25,319 25,319 25,319 25,319 Deferred Tax Assets - 14 10 10 10 Long Term Loans and Adv. - 1,255 2,538 2,538 2,538 Other Non Current Assets - 349 691 691 691 Investments 1,712 1,094 1,836 1,836 1,836 Current Assets 2,373 6,501 9,610 16,090 23,373 Cash & Deposits 929 4,427 7,014 12,845 20,117 Loans & Advances 832 422 838 838 838 Other 612 1,652 1,758 2,531 2,541 Inventories 291 90 137 481 483 Debtors 307 1,483 1,497 1,925 1,934 Others 14 79 125 125 125 Current liabilities 1,481 1,610 2,603 2,298 2,661 Creditors 987 1,314 2,483 2,177 2,541 Provisions 494 296 121 121 121 Net Current Assets 893 4,891 7,007 13,792 20,711 Mis. Exp. not written off - - - - - Total Assets 37,714 44,913 50,850 60,171 68,841 October 22, 2012 7
Cash Flow Statement (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E Profit before tax 1,016 6,900 8,423 12,434 11,571 Depreciation 178 1,223 1,471 1,484 1,750 Change in Working Capital (708) (1,009) (274) (954) 353 Less: Other income (123) (222) (664) (667) Direct taxes paid (175) (1,259) (2,129) (782) (734) Others 234 606 (198) - - Cash Flow from Operations 545 6,338 7,071 11,518 12,273 (Inc.)/ Dec. in Fixed Assets (3,366) (2,565) (2,956) (4,020) (3,500) (Inc.)/ Dec. in Investments 2,529 (3,771) (9,147) - - Others 236 90 245 - - Other income - 1,326.9 9,127 664 667 Cash Flow from Investing (601) (4,918) (2,731) (3,356) (2,833) Issue of Equity 2 67 59 - - Inc./(Dec.) in loans (880) (743) (1,448) - - Interest Paid (Incl. Tax) (168) (197) (132) - - Payment of dividend - - - (2,330) (2,167) Cash Flow from Financing (1,045) (873) (1,522) (2,330) (2,167) Inc./(Dec.) in Cash (1,102) 547 2,819 5,831 7,272 Opening Cash balances 2,413 622 1,147 4,446 12,845 Closing Cash balances 637 1,147 4,446 12,845 20,117 October 22, 2012 8
Key Ratios Y/E March FY2010 FY2011 FY2012 FY2013E FY2014E Valuation Ratio (x) P/E (on FDEPS) 62.5 10.1 8.0 5.5 5.9 P/CEPS 45.8 8.6 6.8 4.9 5.1 P/BV 1.9 1.6 1.3 1.1 1.0 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 EV/Sales 41.1 6.1 4.8 2.8 2.4 EV/EBITDA 68.1 7.6 6.2 3.7 3.3 EV/Total Assets 1.8 1.4 1.1 0.8 0.6 Per Share Data (`) EPS (Basic) 5.4 33.3 42.2 61.1 56.8 EPS (fully diluted) 5.4 33.3 42.2 61.1 56.8 Cash EPS 7.4 39.5 49.7 68.9 66.0 DPS - - - - - Book Value 178.1 211.9 253.9 303.2 348.8 Returns (%) ROCE (Pre-tax) 1.7 17.1 16.3 21.4 17.1 Angel ROIC (Pre-tax) 2.4 22.0 20.6 103.5 (57.3) ROE 3.2 17.1 17.9 22.0 17.5 Turnover ratios (x) Asset Turnover (Gross Block) 0.7 0.7 0.4 0.4 0.3 Inventory / Sales (days) 52 7 3 6 10 Receivables (days) 52 32 46 36 40 Payables (days) 615 208 266 203 176 WC cycle (ex-cash) (days) (102) 8 7 10 16 Solvency ratios (x) Net debt to equity 0.1 (0.0) (0.1) (0.3) (0.3) Net debt to EBITDA 2.5 (0.2) (0.8) (1.1) (1.7) Interest Coverage (EBIT/Int.) 21.1 23.5 34.6 91.2 101.3 October 22, 2012 9
Research Team Tel: 022 3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com Disclaimer This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Cairn India 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) October 22, 2012 10