Cairn India (Buy)
Fair value: ₹400
Our fair value estimate for Cairn India of ₹400 a share implies a dividend yield of 3.3 per cent, free cash flow yield of 12.5 per cent, and a 2015 enterprise value (EV)/ operating profit margins multiple of 4.7. Delays in Government approvals on oil field development plans have delayed the exploration and production ramp-up over the last couple of reporting periods. We see this changing over our forecast period, as the company has received approval for integrated development plan of the field. This will accelerate the development of its oil and gas fields. Therefore, we believe Cairn India should start getting valued around 2011-2012 average EV/OPM multiple of 5.5. Our valuation multiple rises towards the end of our forecast period to 5.5 in 2019, consistent with our global peers’ valuation.
Positive attributes include 1) one of Asia’s highest profit after tax a barrel of $55 at our forecast 2015 crude prices of $102 a barrel; 2) a potential benefit if the Indian rupee continues to depreciate against the dollar; 3) approval for the integrated development plan, coupled with accelerated drilling, should increase the production ramp over our forecast period.