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Oil & Gas

India I Equities
24 August 2010

Cairn India
Vedanta deal – ONGC counter-bid unlikely
 Event. Media reports suggest that ONGC, along with GAIL and OIL India, may make a counter-bid for Cairn India. The ONGC Board is scheduled to meet on 26 Aug to decide on the deal. Valuation may act as hindrance to counter-bid. Vedanta has valued Cairn India’s 2P reserves at EV/2P of US$24/bbl, which is higher than the US$14-17/bbl range at which most E&P companies trade. We believe Vedanta had factored in a long-term crude price of US$95/bbl for valuing Cairn India vis-à-vis our crude assumption of US$70/bbl and current crude price of US$73/bbl. The high valuations might hinder any bid from the ONGC-led consortium, in our view. Earlier too in ’05, Cairn Energy had offered its interest in the Rajasthan and other fields to ONGC for ~US$5bn; ONGC had declined on valuation basis. ONGC may seek management control of Rajasthan block. Media reports suggest that production-sharing contracts (PSCs) for Cairn India’s seven exploration blocks have a provision to seek prior government approval before ownership is altered. Hence, during negotiations, government may suggest that management control of Cairn’s key Rajasthan block be given to ONGC (ONGC already has 30% stake in the block). This might dispel India’s concerns about a non-oil player operating a strategic national oil asset. Vedanta bid may not be a concern for energy security. As Cairn India’s assets are largely in India and are producing, the deal might not pose any risk to India’s energy security. The ONGC-led consortium may instead use the funds to acquire assets overseas, leading to enhanced energy security. Further, as NELP IX auctions are expected around Oct ’10, the government is likely not to dishearten foreign investors by posing hindrance to the Vedanta deal. Valuations. Our DCF-based valuation for Cairn India stands at `280/share at a long-term Brent price assumption of US$70/bbl. Risks are higher-than-expected crude prices and higher reserves upside. Relative price performance
CY07 FY09 FY10e FY11e FY12e

Rating: Sell Target Price: `280 Share Price: `344

Dayanand Mittal
+9122 6626 6738

Key data
52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public

CAIR IN / CAIRN.BO `368 / `247 18409 / 5504 US$25.4m `652bn / US$14.0bn 1,897m 37.6% 62.4% 10.6% 7.3% 19.7%

Key financials
Year-end 31 March

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) EV/EBITDA (x) RoE (%) RoCE (%) Net gearing (%)
Source: Company, Anand Rathi Research

10,123 (245) NM NM NM 1.9 120.5 -0.1 0.7 (3.5)

14,327 8,036 4.2 NM 63.6 1.7 66.0 2.6 1.4 (6.6)

16,230 10,511 5.5 30.9 64.5 2.1 79.0 3.2 1.9 14.6

63,796 34,677 18.3 226.7 19.4 1.9 14.7 9.7 10.0 14.2

105,032 65,852 34.8 89.9 10.2 1.6 8.1 16.2 16.0 5.3
Source: Bloomberg
110 100 90 Aug-09 Sep-09 Nov-09 Dec-09 Jan-10 Apr-10 Oct-09 May-10 Aug-10 Feb-10 Jun-10 Mar-10 Jul-10 Sensex 140 130 Cairn India 120

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Vedanta has announced an open offer (from 11 Oct ’10) of `355/share for minority shareholders (for up to 20% stake in Cairn India) as against `405/share paid to promoters. Cairn India operates two producing blocks (Ravva and CB/OS-2).5 Less: Net debt 1. which is at 22% premium to Cairn India’s closing price on 11 Aug ’10 (after which market buzz about the deal increased). Besides its Rajasthan assets. probable and EOR potential (%) WACC (%) 2P gas reserve entitlement (m boe) 2P oil reserve entitlement (m boe) Shares outstanding (m) 70 Rajasthan (EV) 100 Cambay (EV) 12.575/share). Further. Hence. Anand Rathi Research Anand Rathi Research 2 . though it does not make the nod mandatory in case of change of ownership at the corporate level. Media reports suggest that the PSCs for Cairn India’s Rajasthan block.e.154 42 94 1.0 404. We factor in Cairn India’s cess payment of `927/ton for Rajasthan crude (implying the impact of `10/share if the cess payment is higher. Valuation We value Cairn India’s 2P and contingent (i.1 Ravva (EV) 9. at `2.24 August 2010 Cairn India .155 9. But PSCs for the seven exploration blocks that the company won during NELP rounds provide for prior government approval before ownership of a participating company is changed. Our DCF-based valuation assumes a long-term Brent price of US$70/bbl. EOR) reserves based on the DCF-methodology.Vedanta deal – ONGC counter-bid unlikely Vedanta deal The Vedanta Group has offered to acquire 40-51% stake in Cairn India at `405/share (including `50/share as non-compete fee) from Cairn Energy. The open offer price excludes the non-compete fee. Deal might be contingent on government approval.135 261 1 2 28 236 44 280 Source: Company. it appears that the deal is contingent on government approval. while awarding the blocks. we utilise a multiples-based approach. the government gives significant weight to technical capability and experience of the participating company.897 Equity Valuation Exploration / development upside (at average US$8/boe) Target Price 10. Fig 1 – Valuation matrix Assumptions US$ m `/share Long-term Brent price (US$/bbl) Proven. Cairn India also holds seven exploration blocks in India and one in Sri Lanka. Cambay basin block and Ravva fields provide for explicit government approval only in case of a party selling its interest in the block. Further. To calculate the exploration and development upside. where ONGC has the majority participating interest..

Vedanta deal – ONGC counter-bid unlikely Peer valuation Fig 2 – Peer valuation 20 Peers normally trade at EV/2P reserves in the US$14-17/bbl range. Anand Rathi Research Sensitivity to crude price Fig 3 – Valuation sensitivity to crude price (`/share) 520 480 440 400 360 320 280 240 200 160 120 80 40 30 Our valuation of `280/share is based on crude price assumption of US$70/bbl Our TP at Rs280/share assuming US$70/bbl 40 50 60 70 80 Source: Anand Rathi Research Anand Rathi Research 90 3 .24 August 2010 Cairn India . as against the potential deal valuing Cairn India at US$23/bbl 15 10 5 0 Occidental Anadarko Encana Apache ONGC 100 (US$/bbl) 110 Devon EV/Reserves Average Source: Bloomberg.

1 Billion boe 293 468 B 151 78 R&S STOIIP 1 . Resources 1 and Potential 2 Most Likely Prospective In Place 140 250 Risked Propsective Resource GAS GIIP 1015 R & S 12 BH + Others 20 additional discovered fields including Barmer Hill Oil STOIIP Contingent In Place A 110 707 R & S 12 B 222 2.24 August 2010 Cairn India .5 Billion boe Gross Initial In Place Volumes ~ 4 Billion boe ~2.293 MBA STOIIP Risked Prospects.Top 35 prospects audited by D&M risked resource 178 mmbbls B 151 M 477 M 671 MBA Fields. Leads & Concepts M B A R&S Contingent Resource 2P+2C 2P+2C + EOR Barmer Hill + Other Fields mmbbls mmbbls Source: Company Anand Rathi Research 4 .The Independent estimates of Reserves and Contingent Resources recently carried out by D&M are in line with the CIL estimates 2 .5 Billion boe in 35+ prospects Gross Reserves. Raageshwari and Saraswati FDP Approved 1.Vedanta deal – ONGC counter-bid unlikely Fig 4 – Cairn’s revised resource potential ~ 6.

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