Merrill Lynch retains 'Buy' rating on Cairn India

RESEARCH: MERRILL LYNCH
RATING: BUY
CMP: RS 194

Merrill Lynch retains 'Buy' rating on Cairn India with a price target of Rs 226. Brent price forecast is cut by 11-20 % for FY11-FY 12E, the first two fullyears of oil production from the main RJ-ON-90 /1 block of Cairn India.

This led to a cut of FY11-FY 12E EPS forecasts by 16-22 %. Despite the long-term Brent price cut to $72/bbl from $90/bbl, Merrill Lynch raises price target for Cairn by 3% to Rs 226. This is because the old price target had been effectively based on a long term Brent of $70/bbl while new target is based on $72/bbl. Merrill Lynch expects Cairn’s oil and gas production volumes to jump 5x in FY11E and 7x in FY12E from its 2007 level.

Oil production starting and ramping up from its main block RJ-ON-90 /1 should drive volume and earnings. Cairn’s current share price of Rs 175 discounts long-term Brent price of $54/bbl if exchange rate is taken at Rs 45 and $47/bbl if exchange rate is Rs 50.
Source: ET