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.