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Cairn India Limited

2
Rajasthan development
to produce 125,000
bopd by CY mid-2010
on
schedule
Cairn expects a
plateau production
rate of 125,000
bopd from its MBA
fields by CY mid-
2010. First oil
production
commenced from
the Mangala field in
Rajasthan on 29
August 2009. The
pipeline is expected
to be completed by
Q1 CY10. Also, by
early application of
EOR techniques,
the production may
ramp up to 225,000
bopd after 2011.

Attractive pricing to
keep Demand for
Rajasthan oil Strong
The 3rd Quarter oil
price realization at
US$ 66 / bbl is
roughly 12%
discount to Brent,
in line with the
estimates and
management
guidance. The
demand concerns is
abated given such
attractive pricing
and also the new
capacities that are
set to be
commissioned going
forward.

Strong execution and


excellent operational
efficiency
CIL had one of the
lowest operating
expenses in the
world with its field
direct opex at Ravva
and Cambay Basin at
US$ skills gives us a lot of
2.4 confidence in the
per company's
barrel profitability going
in forward.
2008.
The Debt worth US$ 1.6
Rajast billion raised quells
any funding issues in
han Rajasthan
upstre going forward
am On October 14,
opera 2009, Cairn India
ting announced that it
expen completed
ses financing
are arrangements for
estim US$1.6 billion for
ated funding its
at Rajasthan project.
US$ The proceeds are to
3.5 be used to repay
per the existing facility
barrel of US$ 850 million
and and to continue to
the fund the ongoing
pipeli projects in
ne Rajasthan. The
opex additional funds
is will also help to
estim accelerate some of
ated the projects in
at Rajasthan and Cairn
US$ can look at the
1.5 options of doing
per them earlier.
barrel
during Oil production de-risks
the the Rajasthan project
as cash flow
life of
visibilities get
the
clearer
field.
Cairn started the
A
production of first
focus
oil from Rajasthan
ed
on August 2009.
appro
That along with the
ach to
on-schedule
mana
execution of the
ging
complex Rajasthan
its
field has
cost
established the
of
certainty of Cairn's
opera
cash flows in the
tions,
years to come from
along
the Rajasthan
with
fields. This visibility
its
of cash flows also
execu
insinuate at the
tion
immense fillip to
valua n results, further
tions exploration potential
in the untapped - BUY.
event
of Valuing CIL using the
furth SOTP method, we
er use DCF
disco methodology to
veries arrive at INR 261.2
. for Cairn's currently
producible and
No developing assets,
downside
risk from and EV/boe to
exploratio
3
arrive at INR 38.7 for potential exploration upside. We assume a stable oil price of US$ 80/bbl. Thus our valuation of CIL
of INR 300 represents a 17.6% upside over CMP.

With FY11 being the first full year of Cairn's cash flow, expect multiples like PER and EV/EBITDA become a key
consideration in its valuations. On a comparative basis, CIL looks extremely attractive trading at a P/E of 6.8x and 5.6x
for FY2011 and FY2012 respectively, and at an EV/EBITDA of 5.7x and 4.2x respectively.

Given the factors such as strong management and excellent execution, attractive valuation, upturn in the global
economy boding well for oil prices, limited downside risks, we initiate our coverage on Cairn India with BUY.
Summary Financials

Particulars 15ME Mar 09 12ME Mar 10E 12ME Mar 11E 12ME Mar 12E
Net Sales (INR mn) 14,326.7 23,097.2 105,815.1 143,149.0
PAT (INR mn) 8,133.3 16,397.5 71,177.9 86,471.5
EPS (INR) 4.3 8.6 37.5 45.6
ROCE (%) 2.7% 4.9% 18.6% 19.5%
RONW (%) 2.5% 4.8% 17.3% 17.5%
P/E (x) 59.5 29.5 6.8 5.6
EV/EBITDA (x) 46.2 22.6 5.7 4.2

A Better play vis-à-vis RIL – No downside for CIL at current valuations, only upside on hydrocarbons discovery
It is well known that the Petroleum giant RIL's market capitalization has approximately 35-40% contribution from its E&P
business. This is deserving of a mention here because much of this valuation also builds in the expected findings from
the blocks under exploration. Hence, we may see in the case of RIL, results of drilling activity leading to commercial
hydrocarbon discovery, bringing about a negative reaction from the markets simply because the numbers may not match
up to those in-built expectations. Hence, there is a large exploration risk associated with the stock at any point of time.

Whereas for CIL, as explained earlier, such an exploration risk is non-existent given that we do not see any value
attributable to these assets in the current prices.

We value these assets conservatively to include an estimate from initial findings, while refraining from building in
significant risks to out valuation for Cairn India Limited.

4
Investment Analysis
Potential upside from exploratory blocks not captured

Cairn is one of the major long term oil and gas exploration players and has over 40 discoveries in the last 10 years to
show for its efforts. Cairn Energy, the parent of Cairn India has an exploration success ratio that is close to 40%. The
current valuation of Cairn by the markets has factored in the production from the Rajasthan fields. However, the fact
that Cairn continues to undertake exploration activities and report more findings of commercial interest has faded away
in the backdrop of oil production awaited from MBA fields in Rajasthan.

This gives us a two-pronged advantage to the stock whereby:


Thereisno exploratory risk. Hence unlike with RIL, any commercially viable hydrocarbon discovery is not going to act
as adampener on the scrip as there are no expectations built into its market price.
Whilethere is no downside possibility from any news, every commercial discovery of any quantum is the upside, and
suchdiscoveries are a certainty given the large portfolio of Cairn's assets.

Some cases in point:

Cairnhasdiscovered hydrocarbon resources in Barmer Hill formation over Mangala and Aishwarya fields, estimates at
400Mn Barrels of STOIIP. Cairn is planning to conduct pilot activities to evaluate this additional resource potential
and the associated development options.
Inthesouthern part of the Barmer Basin, Cairn made another oil and gas discovery in an adjacent field in December
2008.Early tests indicate a potential oil flow of around 500 bopd, plus 0.4 mmscfd gas.
Ithasbeen awarded two more offshore blocks in the bidding rounds in NELP VIII. The MB-DWN-2001 deep water
offshoreblock has an estimated most likely in-place reserves summing up to 155 mmboe. The KG-OSN-2009/3 block
has an estimated 70 mmboe in-place reserves.

On schedule to achieve production rate of 175,000 bopd by 2011 – with a peak production potential of 225,000 bopd

Cairn expects a plateau production rate of 175,000 bopd from its MBA fields by 2011. It is moving on time to set up
infrastructure to be able to extract 205,000 bopd, the current assessment of the EOR resource base is greater than 300 mmbbls
of incremental recoverable oil from MBA fields. With the project milestones being impressively being achieved more or less on
schedule, it appears certain that the production from primary techniques should ramp up to 175,000 bopd by 2011.

Further production upside from application of EOR techniques

Cairn India looks to apply the Enhanced Oil Recovery (EOR) techniques of production in the earlier years to boost production.
The estimate of oil resource that can be produced by EOR technique stands at 308 Mn Barrels. Any incremental productions
through application of EOR techniques will be accommodated in the additional infrastructure at the Mangala Processing
Terminal (MPT), which is currently being set up to take total production rate to 205,000 bopd.

Production Rate (boepd)


250,000 208,121
196,000

200,000
159,700
146,370
150,000 134,290

94,00
100,000 3

50,000 18,698
-
12 ME 15 ME 12 ME 12 12 ME 12 ME 12 ME 12 ME 12 12 ME 12 ME 12 ME 12 ME
ME ME

FY16
FY08 FY 09 FY10e FY11e FY12e FY13e FY14e FY15e e FY17e FY18e FY19e FY20e

5
Cairn had obtained US$ 625 million through a private placement of its shares – the largest private placement in the Indian
equity market during 2008-2009. In addition, Cairn had a debt financing facility for US$ 850 million to fund the upstream
development. On October 14, 2009, Cairn India announced that it completed financing arrangements for US$1.6 billion for
funding its Rajasthan project. The borrowings are of a long term nature with tenure of six years. The proceeds are to be used
to repay the existing facility of US$850 million and to continue to fund the ongoing projects in Rajasthan. The additional funds
will also help to accelerate some of the other projects in Rajasthan and look at the options of doing them earlier.

Strong execution capability

CIL has demonstrated strong execution capabilities in the past and continues to show case the same with its ongoing
development of the Rajasthan fields. Cairn's technological expertise and execution skills have thus far seen it
successfully keep up with its aggressive schedule of producing oil from the MBA fields in Rajasthan. Prior to this, the
execution at Cambay fields had achieved the notable milestone where discovery to delivery took just 28 months.

Operational Efficiency enabling low cost production

CIL had one of the lowest operating expenses in the world with its field direct opex at Ravva and Cambay Basin at US$
2.4 per barrel in 2008. The Rajasthan upstream operating expenses are estimated at US$ 3.5 per barrel and the pipeline
opex is estimated at US$ 1.5 per barrel during the life of the field. Cairn has consistently sought to look out for various
ways of optimizing cost in Rajasthan, in the process of which it manages to bring the planned capital expenditure for
2008 and 2009 down to US$ 1.4 bn from US$ 1.8 bn. Such diligent operational focus, ailing with its execution skills gives
us a lot of confidence in the company's profitability going forward.Certainty in a Probabilistic Industry

A chain is only as strong as its weakest link. Nothing more aptly describes the functioning in Oil and Gas exploration
sector, where along with the exploratory and extraction efforts, one hopes and prays to get various elements of the
chain going in favourable direction:
Thetechnical capabilities to carry out discovery and extraction in economically viable
mannerThediscovery of commercial hydrocarbons – which is never assured
Availability of adequate funding to carry out expensive exploration and development
operationsTheprevailing prices of oil

If observed carefully, a slight weakness in any of the elements above is capable of rendering the whole process starting from
finding to extraction to finally selling the oil - unviable. This emphasizes the highly probabilistic nature of success, where in,
the attainment of some of these factors at a given point of time may be dependent totally on the external circumstances.

In such an environment, Cairn has emerged as a player perfectly placed with deep rooted strength in each of its links
defying any chances of a possible setback to its now-emerged story promising a decade of assured profits!

The oil US$ 1.6 bn funding implies


discovery in
adequate financing to meet the
Parent's vast Rajasthan well and
development needs in Rajasthan and
truly ensures the
years of rich global
also gives the opportunity to
production for many
experience to ensure
accelerate some other projects
years
any technical

assistance that may


be needed

Oil Prices at around US$ 75-80 do


not threaten to reach US$ 40 levels –
with the demand supply economics
and the return of growth on the
global front

6
A Cyclical Industry – The discovery of oil may be perfectly timed

In a cyclical industry, even a successful company's earnings and ultimately, its valuation is influenced by cyclical trends. Such
companies would be heavily dependent on the prevailing economic scenario and the prices dictated by it, leaving their fate to
be decided on such circumstances more often than the quality of management, business model, and employees.
It needs no saying that the essence of a successful investment in cyclical lies in buying at the bottom and selling
high. Hence, the first step remains the most crucial one to make it big: Enter in at the right time.

The production of oil at this juncture, considering the cyclical aspect, is doubly promising

The wild fluctuations in crude prices in the last year are bound to cause some element of nervousness in companies
investing in activities pertaining to oil production. When the prices hovered around the US$ 140 levels, investing in oil
exploration tasks was appealing to many companies. But the same oil companies could be forgiven for taking a U-turn in
their view points of the business when the oil prices crashed to sub-40 level in a matter of months.

Though oil prices are now again flirting with the US$ 80 levels, we are only just amidst the beginning of a slow but
assured recovery. As far as the cycle goes, it is definitely in the right direction for Cairn. It looks pretty clear that the
chances of oil prices reaching similar lows are next to negligible. Hence US$ 75 – 80 should provide strong support to
crude prices, with the only possible movement conjectured is upwards.

This uptick in the industrial activity globally comes combined with the ever depleting reserves from producing sites shall
keep pushing the oil prices upwards, with little case for a price revision downwards. The same is also pointed out by the
gradual drift in oil prices upwards over the past one year or so.

Crude Oil Price


90

80
70
60
50 The reviving global economy

40
and stabilizing oil prices imply
30
room for only upward
20
movement in oil prices going
10 forward
0

Dec 01, Jan 01, Feb 01, Mar 01, Apr 01, May 01, Jun 01,Jul 01, Aug 01, Sep 01, Oct 01, Nov
01,
2008 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009
7
The Call Option – Funds Availability set the ball rolling for the Long-term

Cash Flow generated from oil


Production in Rajasthan

Meet Funding Requirement of


Funding of US$1.6 Bn
Cairn’s other assets
Development of
Rajasthan Fields

In October 2009, Cairn India completed financing arrangements for US$1.6 billion to be used to repay the existing
facility of US$ 850 million and to continue to fund the ongoing projects in Rajasthan. The additional funds will also help
to accelerate some of the projects in Rajasthan and Cairn can look at the options of doing them earlier.

The much-awaited production of Oil from Rajasthan fields finally kick-started in August 2009. This production is expected to
gradually pick up to 205,000 barrels of oil per day by 2011, ensuring healthy cash flow generation for the firm.

The production of oil from Rajasthan fields is a strong fillip as far as the capital required for carrying out the
development activities in other assets is concerned. Strong cash flows emanating from the sale of oil will ensure an
extremely strong Balance Sheet.

Thus the assets of the company and their current phases in the oil development life cycle are in attractive alignment to
see Cairn building upon them over many years to come, beyond the life of Rajasthan fields.
8
Risks and Concerns
Oil prices – a 1% change in oil price effects our CIL valuation by 1.3%

As per the PSC agreement, CIL will be selling the oil from Rajasthan fields at 10% – 15% discount to the Brent prices that
prevailed in the last six months. While we believe the given the global economic recovery, the oil prices are headed upwards
with a positive swing in prices, any negative shock on this front may hamper our estimates and Cairn's profitability.

The strong correlation with which CIL follows the oil prices is depicted with the movements of the scrip in relation to oil
over the past one year:

250
Oil Price

200 Cairn Price


150

100

50 100 base

Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

Delay in setting up the pipeline

The company had targeted the completion of pipeline from MPT to the Gujarat coast by Q4 2009. However, there has
been a slight delay in the same and, it is now expected to be up and running by Q1 2010. While the management's
conviction in delivering the full Mangala plateau in the first half of 2010 remains, any further delay in the completion of
laying the pipeline will hamper the delivery of oil.

The ongoing VAT issue may pile up to the Cess Payment

The Rajasthan government has sent a notice to Cairn demanding the company pay 4% VAT instead of 2% CST on the sale
of crude oil from Cairn's oil fields at Barmer in Rajasthan. If this VAT is not passed on to the refining company's it
further hits the company's revenues by 200 bps. Additionally, the company is already provisioning for INR 2500 cess per
tonnes of oil it sells (~ US$ 7.4 – US$ 7.5 per barrel of oil)

Currency Fluctuations

Any fluctuations in the dollar will also have an impact on the prices of oil. Only as we settle into a more stable
environment shall this aspect be clearer over time. As of now, the fluctuations in currency will continue to pose a risk-
factor which Cairn is expected to deal with.
9
Valuation and Opinion
We value Cairn India Limited using SOTP method. We use the DCF method for the company's existing assets currently
producing or under development, and EV/boe method for valuing its potentially producible assets.

Valuation using DCF

One of the major issues that impact the valuations is the cess payment that Cairn is currently providing for. We have
assumed a discount to the Brent at the lower end of 15% for sale of Rajasthan oil.

Oil production Assumption: We assume the oil production to commence on schedule, and the ramp up in the same as
per the management guidance. We have also accounted for the incremental production as a result of the EOR
techniques to be applied at the initial stages of production. Hence, by 2012 – 2013, we have assumed the production
rate of 175,000 bopd from the fields, capable of going upto 225,000 with the help of EOR.

The assumptions table is as follows:

Assumptions
Oil price ($/Barrel) 80
Avg $ Rate (INR/$) 47.0
Discount to Brent on sale of Rajasthan Crude 12%
Cess US$ per barrel (INR per tonne = 2500) 2.7
Operational Cost (US$/bbl) 5
Discount Rate 12%
VAT 4%

Given below is the Sensitivity of our target price to US$ and Currency rate:

Sensitiviity Analysis Oil Price (US$/Barrel)

Currency Rate (INR/US$) 60.00 70.00 80.00 90.00 100.00


40.00 190 217 255 294 332

42.50 201 231 271 312 353


45.00 245 244 287 330 374

47.50 212 258 303 349 394


50.00 223 271 319 367 415

Valuing other assets, with potential in-place reserves

The potential in-place reserves from the Barmer basin in Rajasthan not included in our valuations above, MB-DWN-2001
deep water offshore block and KG-OSN-2009/3, the last two won in NELP VIII, are valued using EV/boe technique
whereby we have given a US$ 2.5 value/boe. With 625 Mn STOIIP, the valuation of these reserves sums up to INR 38.7
per share. However, this does not include the potential discovery from Mannar Basin in Sri Lanka.
Hence, using SOTP, we arrive at a value of INR 300 per share for Cairn India Ltd.

10
Cess payment @ US$ 7.5/bbl being paid under protest: CIL is currentlyairn India Limited paying INR 2,575/tonne (US$
7.5/bbl) as cess on Rajasthan's crude production. This is however under arbitration as CIL maintains that it should be
paying no more than INR 927/tonne (~ US$ 2.7/bbl). The company had initiated arbitration proceedings on the issue
saying it is not liable to pay any cess. We perform our DCF analysis in the base case, bear case and bull case of CIL, and
the key assumptions and results have been tabulated below. We assume a 10% diversion in oil prices and 5% in currency
to arrive at our bull case and bear case estimates:

Assumptions Base Case Bull Case Bear Case


Oil Price (US$/barrel) 80 88 72
Cess payment (USD/barrel) 2.7 - 7.5
Currency Rate (INR/US$) 47 49.4 44.7
TP (INR/Share) 299.9 360.6 237.6

Based on our Valuation, we arrive at a fair price value for Cairn India at INR 300.0 per share. At CMP of 255, the scrip is
trading at a 17.6% discount to our estimate.

Opinion: CIL is currently trading below our target price of INR 300.0 (base case). Our target price indicates a 17.6%
upside in the stock at current levels. The execution capabilities of the company are amongst the best in class. Any
further discovery from potential reserves is not incorporated in the valuation as per our estimates.

From DCF based to Multiple based approach: With FY12 being the first full year of Cairn's cash flow, expect Cairn to be
traded on the basis of its multiples like PER and EV/EBITDA from the current DCF valuations. At current estimates of the
company, CIL looks extremely attractive trading at a P/E of 6.8x and 5.6x for FY2011 and FY2012 respectively, and at an
EV/EBITDA of 5.7x and 4.2x respectively for the same period. In comparison, RIL is trading at a PE of 14.1x and 12.5x for
FY2011 and FY2012 respectively, and EV/EBITDA multiple of 9.4x and 8.5x respectively.

As the production picks up in the quarters to come and the company starts to deliver on its targets, we expect the stock
to be re-rated on the basis of valuation multiples, on which fronts, the scrip is extremely attractively placed at the
moment as mentioned above.

Thus, given the strong management and excellent execution, upturn in the global economy boding well for oil prices, limited
downside risks, and the untapped value of potentially producible assets, we initiate our coverage on Cairn India with a BUY.
11
Q3 FY10 – Result Update
Earnings Statement Dec 09 Sep 09 QoQ (%) Dec 08 YoY (%) 9ME Dec 09 9ME Dec 08 YoY (%)

Particulars (INR Mn)

Net Income From Operations 4,954.6 2,297.8 116% 2,108.2 135% 9,302.0 9,350.8 -1%

Expenditure 1,922.2 1,082.1 78% 1,533.6 25% 4,041.5 4,283.1 -6%

Increase/(Decrease) in Stock in Trade (652.0) (259.1) 152% 90.8 -818% (1,066.2) 215.1 -596%

Employees Cost 406.9 211.2 93% 271.1 50% 833.4 722.6 15%

Exploration Cost 440.4 117.1 276% 375.4 17% 866.3 882.3 -2%

Operating Costs 1,341.7 623.5 115% 358.6 274% 2,405.4 1,307.7 84%

Administration and other costs 385.2 389.4 -1% 437.7 -12% 1,002.6 1,155.4 -13%

Forex Fluctuation - - - - -

Operating Profit 3,032.4 1,215.7 149% 574.6 428% 5,260.5 5,067.7 4%

Other Income 998.5 1,056.2 -5% 1,451.0 -31% 3,344.4 4,084.4 -18%

EBITDA 4,030.9 2,271.9 77% 2,025.6 99% 8,604.9 9,152.1 -6%

Depreciation, Depletion and Amortization 299.7 390.5 -23% 325.8 -8% 1,103.5 1,622.6 -32%

EBIT 3,731.2 1,881.4 98% 1,699.8 120% 7,501.4 7,529.5 0%

Interest 260.0 8.8 6.1 276.1 39.5

Profit before tax and exceptional items 3,471.2 1,872.6 85% 1,693.7 105% 7,225.3 7,490.0 -4%

Exceptional Items - 1,637.1 - - -

PBT 3,471.2 3,509.7 -1% 1,693.7 105% 7,225.3 7,490.0 -4%

Tax 561.6 (1,185.4) -147% (670.5) -184% (833.7) 806.8 -203%

Current Tax 700.7 804.5 61.0 1,738.2 398.3

Deferred Tax 347.1 (1,293.0) (710.0) (1,364.3) 328.6

FBT - (175.0) (21.5) (105.2) 79.9

MAT Credit Entitlement (486.2) (521.9) - (1,102.4) -

PAT after Ordinary Activities 2,909.6 4,695.1 -38% 2,364.2 23% 8,059.0 6,683.2 21%

Extraordinary Items - - -

Net PAT Before Minority Interest 2,909.6 4,695.1 -38% 2,364.2 23% 8,059.0 6,683.2 21%

Minority Interest - - -

Net PAT After Minority Interest 2,909.6 4,695.1 -38% 2,364.2 23% 8,059.0 6,683.2 21%
Equity Capital 18,966.7 18,966.7 18,966.7 18,966.7 18,966.7

EPS (INR) 1.5 2.5 -38% 1.2 23% 4.2 3.5 21%

Profitability (%) Dec 09 Sep 09 QoQ (bps) Dec 08 YoY (bps) 9ME Dec 09 9ME Dec 08 YoY (bps)

OPM 61% 53% 830 27% (2,726) 57% 54% 236

EBITDA Margin 81% 99% (1,752) 96% (9,608) 93% 98% (537)

PBT Margin 70% 153% (8,268) 80% (8,034) 78% 80%


(243)

PAT Margin 59% 204% (14,561) 112% (11,214) 87% 71% 1,517

12
Key Highlights

GrossProduction during the quarter was 66,843 barrels of oil equivalent per day, against 63,005 barrels
correspondingquarter previous year. Net entitlement to Cairn was 24,599 boepd against 16,591 boepd.

MangalaAverage gross production was 15.430 boepd and is currently producing ~20,000 boepd. The working
interestproduction was 10,801 from the Rajasthan Block.

Averageprice realisation per boe was USD 66.9 in Q3 FY 2010 and for the corresponding quarter of the previous year was
USD 47.1.

Duringthe quarter, the company repaid earlier borrowings of USD 850 million by drawing upon USD 660 million out of
theUSD 1.6 billion facility secured in October 2009 with the remainder drawn from existing cash balances.

GrossCapex spend in Rajasthan stood at US$ 2,069 Mn, of which US$ 223 Mn was spent during Q3 FY10.

Traintwoand Train three at the Mangala Processing Terminal (MPT) are targeted to attain capacity of 125,000 bopd by end
of Q1 FY11.

Cashavailable as at 31 December 2009 was INR 27,569 million (USD 591 million) and the loan drawn down till 31
December2009 against the loan facility of USD 1.6 billion was USD 688 million.

Theaverage exchange rate realization during the quarter was INR 46.60 per US$.

Thedrilling of the EOR pilot wells is expected to commence in this quarter, the recoverable oil assessment from
whichcurrently stands at 300 million barrels.

13
APPENDIX – Company Background
Cairn India Limited is one of the most significant oil and gas exploration and production companies in India. The company was
incorporated in 2006 by Cairn Energy PLC. In India, Cairn has been developing its interests for more than a decade. Cairn India
is now counted amongst the biggest private exploration and production companies currently operating in the region.
On 9 January 2007, Cairn successfully concluded the flotation of its Indian business with the commencement of trading
of Cairn India Limited on the Bombay Stock Exchange and the National Stock Exchange of India. Cairn Energy PLC
currently holds a 65% shareholding in Cairn India Limited.

Cairn India holds material exploration and production positions in 13 blocks in west India and east India along with new
exploration rights elsewhere in India and Sri Lanka.

This focus on India has already resulted in a significant number of oil and gas discoveries. In particular, Cairn made a
major oil discovery (Mangala) in Rajasthan in the north west of India at the beginning of 2004. Twenty five discoveries
have been made in Rajasthan block RJ-ON-90/1.

In Rajasthan, Cairn India operates Block RJ-ON-90/1 under a Production Sharing Contract (PSC) signed on 15 May 1995.
The main Development Area (1,858 km2), which includes Mangala, Aishwariya, Saraswati and Raageshwari is shared
between Cairn India and ONGC, with Cairn India holding 70% and ONGC having exercised their back in right for 30%. A
further Development Area (430 km2), including the Bhagyam and Shakti fields, is also shared between Cairn India and
ONGC in the same proportion.

Cairn India has a Scottish heritage. In 1979, Sir Bill Gammell founded Castle Cairn Financial Services. By 1986, the majority of
its work was in the expanding gas and oil industry and a new company was formed – Cairn Energy Management.

The company was acquired by Caledonian Offshore Limited in 1988 and was renamed Cairn Energy PLC, just prior to its
flotation on the London Stock Exchange.

As the Indian oil and gas market deregulated in the early 1990s. Cairn turned its focus to South Asia. Ravva in Eastern
India was the first offshore oil and gas field to be developed, followed by the Lakshmi gas field in Western India, which
was discovered in 2000 and commenced production in 2002.

In January 2004, following the largest oil discovery by any company in India since 1985, Cairn India added the Mangala
oilfield in Rajasthan to its assets which, along with the other discoveries in Rajasthan, promise form the core of the
future developments in India.

14
Cairn's India Assets

S. No. Oil and Gas blocks/Fields Area Participating interest


Operated Block
i Ravva Krishan Godavari 22.50%
ii CB-OS/2 - Exploration Area Cambay Offshore 60%
CB-OS/2 - Development Area Cambay Offshore 40%
iii RJ-ON-90/1 - Exploration Area Rajasthan Onshore 100%
RJ-ON-90/1 - Development Area Rajasthan Onshore 70%
iv GV-ONN-2003/1 Ganga valley Onshore 24%
v VN-ONN-2003/1 Vindhyan onshore 49%
vi PR-OSN-2004 Palar Basin Offshore 35%
vii SL 2007-01-001 North West Sri lanka Offshore 100%
viii KG-ONN-2003/1 Krishan Godavari Onshore 49%
ix GV-ONN-2002/1 Ganga valley Onshore 50%
Non-Operated Block
x KG-DWN-98/2 Krishna Godavari Deep water 10%
xi RJ-ONN-2003/1 Rajasthan Onshore 30%
xii GS-OSN-2003/1 Gujarat Suarashtra Onshore 49%
xiii KK-DWN-2004 Kerala konkan basin offshore 40%

xiv CB-ONN-2002/1 Cambay Onshore 30%


Proposed to be reliquished

xv CB-ONN-97/1 Ganga valley Onshore 15%


Relinquished in 2008

xvi CB-ONN-2001/1 Cambay Onshore 30%


Reliquished in2007

15
A Note on Rajasthan Fields
Rajasthan Discovery

The discovery of the Mangala oil field in January 2004 among others in Rajasthan, spurred the flotation and the creation
of a separate Indian business, and Cairn India Ltd. was listed on January 9, 2007 on BSE and NSE. The flow of oil from
the fields in Rajasthan at a planned peak of 205,000 barrels of oil per day (bopd) by CY2011 is expected to meet more
than one fifth of the country's domestic production.

Cairn first came into Rajasthan in the late 1990s, when it acquired an interest in the block RJ-ON-90/1. The Company firmly
believed that the area was not only rich in hydrocarbons but also had all the key ingredients for successful commercial
production. By 2003, Cairn had acquired 100% of the exploration interest and assumed the role of operator of this acreage.
In 2004, a major discovery of crude oil was made in the Mangala field which has been the largest onshore discovery in
India over the last 25 years. This was followed by key discoveries at Bhagyam and Aishwariya which, along with Mangala,
comprising the MBA fields. In all, 25 discoveries have now been made in Rajasthan. Today, Cairn is the operator of the
Rajasthan block, with a 70% development and production interest. The balance 30% is held by India's public sector oil
and gas major, the Oil and Natural Gas Corporation Limited.

The development areas in Rajasthan consist of three contiguous areas:

- Mangala, Aishwariya, Raageshwari and Saraswati (MARS) fields


- Bhagyam
- Kaameshwari West

The total acreage of the development areas in Rajasthan accounts for 3,111 square kilometers (km2).

Mangala Processing Terminal

In order to produce the oil and separate associated gas and water, the Company has set up the Mangala Processing
Terminal (MPT). The capacity to produce 30,000 bopd from Train 1 is up and Cairn is now looking at Trains 2 and 3.

The MPT will have four crude oil processing trains, designed to handle a total capacity of 205,000 bopd with scope for
expansion:

Train1:Capacity of 30,000 bopd from the Mangala field which is ready to start production. Initial evacuation is happening
by trucking.

Train2:Capacity of 50,000 bopd, also from the Mangala fi eld is targeted for completion by Q1 2010, along with the
heated pipeline.

Train3:Capacity of 50,000 bopd — targeted for completion in H1 of 2010 — will access the plateau production of
theMangala field.

Train4:Capacity of 75,000 bopd, designed to accommodate production from Bhagyam and Aishwariya and
furtherexpansion. Will be commissioned by 2011.

16
Rajasthan - Gujarat Pipeline

On 30 April 2008, the Government of India (GoI) approved the shifting of the crude oil delivery point as defined under
the PSC from the MPT at Barmer to the Gujarat coast. Thereafter, 'in principle' approval of RoU (Right of Use) was
granted to lay the pipeline up to the marine terminal on the Gujarat coast. Following the ROU's from GOI, Gujarat and
Rajasthan Governments, initial target for completion was set to Q4 2009.

The 24” heated and insulated pipeline is approximately 700 km long from the MPT at Barmer to a marine terminal on
the Gujarat Coast. Some 154 km of the pipeline is located in Rajasthan and the rest is in Gujarat.

The heated and insulated pipeline has an outer diameter of 24” with an 8” pipeline running along it that will carry
Raageshwari gas that will be used for power generation.

In addition to the main pipeline, there will be a 22 km spur line at Radhanpur (Gujarat), culminating in an export
terminal having two pre-heated tanks, each with a capacity of 9,000 barrels.

Cairn is targeting completion of the pipeline in time to evacuate crude oil by the time Train 2 is operational. The
Company is building facilities that will have the capacity to handle 80,000 bopd through the pipeline by Q1 2010.

17
Reserves estimate
MBA Fields:

StockTank Oil Initially in Place (STOIIP) in MBA is 2,054 Mn Barrels of oil.


Ofthis,the proved plus probable (2P) reserves and resources that can be produced from MBA are estimated to be 685 Mn
barrels.
Inaddition, the estimate of oil resource that can be produced by EOR technique is 308 Mn
Barrels.Therefore, the total 2P estimate from MBA fields is 993 Mn Barrels
CILhasa70% participating interest in Rajasthan fields as per PSC. Therefore 2P reserves on net entitlement basis to
CILstand at 695 Mn Barrels
Theother fields in Rajasthan, and Cairns other assets outside Rajasthan have a net 2P reserve base of 120
mmboe.Hence,the total 2P estimate of Cairn's reserves is 815 mmboe

Reserves Table:

Gross 2P hydrocarbons initially Gross 2P Reserves and Net 2P Reserves and resources
in place (mmboe) Resources (mmboe) (mmboe)
Current Year Previous Year Current Year Previous Year Current Year Previous Year
Rajasthan MBA Fields 2,054 2,054 685 685 479 479
Rajasthan MBA EOR - - 308 308 216 216
Rajasthan - Other Fields 1,708 1,697 86 84 61 60
Ravva Fields 625 584 72 82 16 18
CB-OS/2 Fields 156 116 20 25 8 10
KG-DWN-98/2 650 650 353 353 35 35
Total 5,193 5,101 1,524 1,537 815 818

Effect of Enhanced oil recovery


Schematic representation

Oil Rate Current FDP

175,000 bopd

EOR
Potential to
extend
& enhance
plateau

WATER FLOOD
Mangala, Bhagyam
& Aishwariya

Other prospective fields in Rajasthan:

Additionally, hydrocarbon resources have been discovered in Barmer Hill formation over Mangala and Aishwarya fields,
estimates at 400 Mn Barrels of STOIIP. Fields of similar structures elsewhere in the world have been developed with
recoveries ranging from 7% - 10% of STOIIP under primary recovery, and around 20% as secondary recovery. There are
also a series of smaller fields in Rajasthan. The Kaameshwari West Development Area has been awarded by the GoI and
an FDP is under preparation.

18
Company Financials
Earnings Statement
Particulars (Rs. Mn.) 12ME Dec 06 12ME Dec 07 15ME Mar 09 12ME Mar 10E 12ME Mar 11E 12ME Mar 12E
Net Sales 387 10,123 14,327 23,097 105,815 143,149
- Growth (%) 2512.8% 41.5% 61.2% 358.1% 35.3%
Total Expenditure 569 10,138 10,266 4,238 22,751 36,393
Operating Profit (182) (16) 4,061 18,859 83,064 106,756
- Growth (%) -91.5% -26221.8% 364.4% 340.4%
Other Income 62 1,324 5,945 3,096 7,382 1,423
EBITDA (120) 1,309 10,006 21,955 90,446 108,179
- Growth (%) -1193.3% 664.6% 119.4% 312.0%
Depreciation 8 34 63 1,410 1,410 26
EBIT (127) 1,275 9,943 20,545 89,036 108,153
Interest 3 16 64 48 64 64
PBT (130) 1,259 9,879 20,497 88,972 108,089
Prior Period Adjustment 0 0 0
Extraordinary Items 0 0 0
Tax 56 1,505 1,844 4,099 17,794 21,618
PAT Before MI (187) (246) 8,034 16,397 71,178 86,472
Minority Interest
Share in Associate 0 21 99 0 0 0
PAT (187) (226) 8,133 16,397 71,178 86,472
- Growth (%) 20.9% -3706.8% 101.6% 334.1% 21.5%

Ratio Analysis
Particulars 12ME Dec 06 12ME Dec 07 15ME Mar 09 12ME Mar 10E 12ME Mar 11E 12ME Mar 12E
OPM (%) -47.0% 0% 28% 82% 78% 75%
EBITDA (%) -30.9% 13% 70% 95% 85% 76%
PAT (%) -48.2% -2% 57% 71% 67% 60%
Interest Cover (x) (46.4) 78.8 155.1 425.4 1,391.2 1,689.9
EPS (Rs.) (0.1) (0.1) 4.3 8.6 37.5 45.6
P/E (x) (2,413.0) (2,011.0) 59.5 29.5 6.8 5.6
P/BV (x) 1.5 1.5 1.5 1.4 1.2 1.0
BVPS (Rs.) 166.0 165.8 172.9 180.6 217.1 261.2
Market Cap (Rs. Mn.) 450,155.2 453,491.8 483,650.3 483,650.3 483,650.3 483,650.3
M Cap/Sales (x) 1,161.9 44.8 33.8 20.9 4.6 3.4
EV (Rs. Mn.) 393,929.0 443,298.3 461,943.5 496,598.1 513,868.6 459,094.1
EV/EBITDA (x) (3,291.2) 338.8 46.2 22.6 5.7 4.2
EV/Sales (x) 1,016.8 43.8 32.2 21.5 4.9 3.2
ROCE (%) 0.0% 0.4% 2.7% 4.9% 18.6% 19.5%
RONW (%) -0.1% -0.1% 2.5% 4.8% 17.3% 17.5%

Debt/Equity Ratio (x) 0.0 0.0 0.1 0.2 0.2 0.1


Inventory T/o Days 1,178.7 43.8 42.9 40.0 40.0 40.0
Debtors T/o Days 1,806.5 48.6 38.6 40.0 40.0 40.0
Advances T/o Days 3,098.7 175.5 89.3 90.0 90.0 90.0
Creditors T/o Days 34,796.8 169.2 300.5 40.0 40.0 40.0
Wrkg Cap T/o Days (Ex.Cash) (31,321.6) (28.4) (222.2) 31.5 102.0 102.0
Fixed Assets T/o (Gross) 0.3 9.3 10.0 10.8 29.1 27.9
DPS (Rs.) 0.0 0.0 0.0 1.0 1.0 1.5
Dividend Payout (%) 0.0% 0.0% 0.0% 11.6% 2.7% 3.3%
Dividend Yield (%) 0.0% 0.0% 0.0% 0.4% 0.4% 0.6%

19
Company Financials
Balance Sheet
12ME Mar
Particulars (Rs. Mn.) 12ME Dec 06 12ME Dec 07 15ME Mar 09 12ME Mar 10E 12ME Mar 11E 12E
Equity Capital 17,653 17,784 18,967 18,967 18,967 18,967
Stock Options Outstanding 345 947 389 389 389 389
Reserves 275,018 276,084 308,668 323,168 392,450 476,076
Shareholders Funds 293,016 294,815 328,023 342,524 411,805.3 495,431.8
Borrowed Funds 5,122 3,124 43,564 75,200 67,680 60,160
Deferred Tax Liability 4,258 4,916 5,624 0 0.0 0.0
Total Liabilities 302,396 302,856 377,211 417,724 479,485.3 555,591.8
Goodwill 254,115 253,193 253,193 253,193 253,193 253,193
Fixed Assets 19,962 29,546 65,674 98,574 150,273.9 159,673.9
Investments 4 7,129 1,713 1,713 9,000 18,000
Deferred Tax Asset 0 84 0 0.0 0.0
Current Assets
Inventory 1,251 1,216 1,683 2,531 11,596 15,688
Sundry Debtors 1,917 1,349 1,516 2,531 11,596 15,688
Loans & Advances 3,289 4,867 3,505 5,695 26,091 35,297
Cash & Bank Balance 61,348 13,318 65,271 62,252 37,462 84,716
Other Current Assets 13 135 704 0 0.0 0.0
Current Liabilities & Provisions
Current Liabilities 36,934 4,692 11,794 2,531 11,596 15,688
Provisions 2,782 3,661 4,337 6,234 8,131 10,976
Net Current Assets 28,102 12,531 56,548 64,245 67,018.7 124,725
Debit Balance in P&L Account 212 457 0 0 0 0
Total Assets 302,396 302,856 377,211 417,724 479,485 555,592

Cash Flow
12ME Mar
Particulars (Rs. Mn.) 12ME Dec 06 12ME Dec 07 15ME Mar 09 12ME Mar 10E 12ME Mar 11E 12E
Opening Cash & Bank 61,347.8 13,317.9 101,118.8 137,250.2 164,069.7
Profit After Tax (186.6) (225.5) 8,133.3 16,397.5 71,177.9 86,471.5
Invt Income (62.2) (1,324.1) (5,944.6) (3,095.9) (7,382.4) (1,423.2)
Interest Paid 2.7 16.2 64.1 48.3 64.0 64.0
Miscellaneous Exp W/Off (245.4) 457.2 0.0 0.0 0.0
Depreciation 7.7 33.7 62.6 1,410.0 1,410.0 26.1
Deferred Taxation 43.9 764.2 623.4 0.0 0.0 0.0
Others 981.6 (14,620.4) 0.0 0.0 0.0 0.0
Change in Working Cap (32,458.4) 7,936.1 (10,715.5) (27,564.5) (10,452.0)
CF - Operating Activities (1,323.7) (48,059.8) 11,332.1 4,044.3 37,704.9 74,686.4
Change in Fixed Assets 6,024.0 (342.1) (700.0) (1,500.0) (1,500.0)
Change in Investments (7,124.7) 5,416.1 0.0 (7,287.2) (9,000.0)
Investment Income 62.2 1,324.1 5,944.6 3,095.9 7,382.4 1,423.2
CF - Investing Activities (96,173.3) 223.3 11,018.7 2,395.9 (1,404.7) (9,076.8)
Increase in Equity 155,511.3 1,422.6 25,632.8 0.0 0.0 0.0
Share Issue Expenses 0.0 (204.7) 0.0 0.0 0.0 0.0
Change in Preference Cap 602.0 (558.1) 0.0 0.0 0.0
Changes in Borrowings 1,225.4 (1,997.3) 40,439.5 31,636.1 (7,520.0) (7,520.0)
Interest Paid (2.7) (16.2) (64.1) (48.3) (64.0) (64.0)
Dividend Paid 0.0 0.0 0.0 (1,896.7) (1,896.7) (2,845.0)
CF - Financing Activities 156,734.0 (193.5) 65,450.2 29,691.1 (9,480.7) (10,429.0)
Net Change in Cash 59,237.0 (48,029.9) 87,800.9 36,131.4 26,819.5 55,180.6
Closing Cash & Bank Bal 61,347.8 13,317.9 101,118.8 137,250.2 164,069.7 219,250.3

20

Related Interests