FUNDAMENTAL AND

TECHNICAL ANALYSIS OF
CAIRN INDIA LTD
Security and Portfolio Management

LIBA, Chennai
Adrija Chakraborty
CONTENTS
ABSTRACT…………………………………………………………………………………………..2

ABOUT THE ECONOMY

STANDARD OF LIVING…………………………………………………………………...3

COMPOSITION OF GDP……………………………………………………………………3

INFLATION………………………………………………………………………………….4

MONETORY POLICY………………………………………………………………………4

UNEMPLOYMENT………………………………………………………………………….5

GOVERNMENT AND POLITICS……………………………………………………………5

ECONOMIC FREEDOM……………………………………………………………………..6

INDUSTRY ANALYSIS………………………………………………………………………………7

COMPANY ANALYSIS

FUNDAMENTAL ANALYSIS……………………………………………………………….9

TECHNICAL ANALYSIS……………………………...……………………………………12

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ABSTRACT
This is a fundamental analysis of Cairn India Ltd, the second largest private oil exploration
and production unit in India. In this report I have followed a top down approach, i.e., first we
will analyze the economy in which the company is based, then the particular sector and then
the company concerned.

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ABOUT THE INDIAN ECONOMY
a. Standard of living: GDP and its growth

The first and foremost thing that comes to mind when speaking of the economic environment is the
purchasing power of the people. Although India has the fourth largest GDP in the world in terms of
purchasing power parity, it lags behind when it comes to per capita GDP. The per capita GDP of India
was $2940 in PPP in the year 2009 which ranks 128th.

However, the income distribution is significantly skewed. The Gini co-efficient of India is 36.8. India
has a population of about 1.06 billion people out of which 37.2% live below the poverty line. The
urban areas are more industrialized and people living there have a higher income level than the rural
areas. Since the initiation of the liberalization policies in India in 1991, the economy has really taken
off. The GDP of the nation has grown at the rate of 7.4% in financial year 2009-2010 in spite of the
economic meltdown that affected all parts of the world. There has evolved over time a prospering
middle class population which is the nerve-centre of all economic activities. Thus India has a large
domestic market.

b. Composition of GDP:

In India, 52% of the workforce is employed in agriculture, 14% industry and 34% in the service
sector. However, it is very surprising to see that when it comes to contribution to GDP, 63% of it
comes from the 34% that is employed in the service sector, 20% from industry and only 17% from the
agriculture sector where so many people are actively involved. Thus, the people in the service sector
earn much higher than the rest of the population.

Composition of GDP
Industry Agriculture Services

17%

20%
63%

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c. Inflation:

The inflation rate in India as measured by the wholesale price index stood at 9.97% in July 2010.
Inflation rate refers to a general rise in prices measured against a standard level of purchasing power.
The food inflation value is 11.40%

d. Monetary policy of the Government:

In the wake of the global economic crisis, the Reserve Bank pursued an accommodative monetary
policy beginning mid-September 2008. This policy instilled confidence in market participants,
mitigated the adverse impact of the global financial crisis on the economy and ensured that the
economy started recovering ahead of most other economies. However, in view of the rising food
inflation and the risk of it impinging on inflationary expectations, the Reserve Bank embarked on the
first phase of exit from the expansionary monetary policy by terminating some sector-specific
liquidity facilities and restoring the statutory liquidity ratio (SLR) of scheduled commercial banks to
its pre-crisis level in the Second Quarter Review of October 2009.

The current standing of the different interest rates are as follows:

SLR: 25%

CRR: 6%

Bank Rate: 6%

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Repo: 5.75%

Reverse repo: 4.50%

e. Unemployment:

The total labour force of the country is 467 million which is the second largest in the world. The
unemployment rate is estimated to be around 10.7%.

f. Government and politics:

The Government of India, officially known as the Union Government and also known as the Central
Government, was established by the Constitution of India, and is the governing authority of a union of
28 states and seven union territories, collectively called the Republic of India. The Preamble of the
Indian Constitution lays down the type of government that India has adopted - Sovereign, Socialist,
Secular, Democratic, Republic.

It is the largest democracy in the world and is currently ruled by United Progressive Alliance with
Indian National Congress with centre-left ideals as the major party. The current Prime Minister Dr.
Manmohan Singh is a noted economist. The current government has a pro-industry stance and has
been a part of several economic reforms. It’s most notable achievement includes inflation control and
maintaining a tight regulatory environment which prevented domestic institutions from falling prey to
global financial woes. But despite all these achievements the government failed to deliver on a
number of fronts, primary being its failure to control the rising fiscal deficit. The overall deficit in the
current fiscal is expected to surge to 7.5% of the gross domestic product, as against the projected
2.5% in 2008-09. However, in India, irrespective of the political party, political decisions are largely
influenced by mass agendas.

Political risk rating:

Corruption Perception Index

According to the Transparency International published annual Corruption Perceptions Index (CPI)
ordering the countries of the world according to "the degree to which corruption is perceived to exist
among public officials and politicians", India ranks 84th in the world. The organization defines

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corruption as "the abuse of entrusted power for private gain".
(http://www.transparency.org/policy_research/surveys_indices/cpi/2009.)

Bribe Payer’s Index:

Bribe Payers Index (BPI) is a measure of how willing a nation appears to comply with demands for
corrupt business practices. India holds the 19th rank worldwide in this category.

All these indexes provide a fair idea about the political obstacles that may arise while doing business
in India. Generally, having the political parties’ favour especially the ruling party’s, makes it easier to
get things done in India which is reflected by the relatively high Corruption Perceptions Index.
However, the low bribe payer’s rank shows that with time, the attitude of Indian people especially
businessmen are changing and it actually takes pure business prowess to survive in such a vast and
competitive market.

g. Economic freedom

The economic freedom index released by US based organization; the Heritage Foundation has placed
India at 115th out of a list of 157 countries. This implies that India is a “mostly free” country for
doing business. This One of the reasons for this poor ranking may be the low per capita income of the
country. The most liberalized economies on the index average about $33,579 per capita gross
domestic product while repressed countries average about $3,813.

Secondly although India has removed most of its tariff barriers, there are still some kinds of
protection in the form of non-tariff barriers that exist in the economy. The corporate tax rate for
foreign firms in India is effectively 39.33% which is relatively high. Lastly, the number of days taken
to start a business in India is 60 days which is more than the world average of 35 days.

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INDUSTRY ANALYSIS:
Globally the oil and gas sector accounts for about 60% of the total energy consumption and hence its
importance to world economy can hardly be overlooked. Oil exploration and production is majorly
controlled by the OPEC cartel companies.

Though India is still largely dependent on coal and oil and gas sector accounts for about 45% of the
Primary Energy Mix of India. India presently has one of the lowest per capita consumption of energy.
For example, the Total Primary Energy Consumption (TPES) in India is just 0.51 tonnes of oil
equivalent, while the world average is more than three times this figure, as the table below indicates.
Similarly, the per-capita electricity consumption stands at just 503 Kilowatt-Hour (KwH) per year,
less than one-fifth that of the world average of 2659 KwH and a massive 13515 KwH in the United
States.However, this figure is expected to increase exponentially in the near future and the
Government is trying its level best to increase exploration activities within the country to bridge the
widening gap between demand and supply and cut down on import bills.

The oil and gas sector in India was dominated by the public sector until India’s liberalization in 1991.
Even today, the public sector companies like ONGC and OIL have significant market share. Cairn
India Ltd is the second largest private player in the upstream segment of Oil and Gas sector. It is the
only pure-play exploration and production company in India. Its other peer companies include RIL,
ONGC and OIL.

Two major events this year, the commencement of production of natural gas from Reliance Industries
Ltd's (RIL) Krishna Godavari (KG) fields and the scheduled commencement of production of crude
oil from Cairn India Ltd's fields later this year have provided a major boost to the domestic oil and gas
sector in India and have meant that upstream activities have received major attention over the past
years. Given India's targeted GDP growth, India's fuel needs are likely to expand at a substantial rate.
India's per-capita consumption of energy and electricity is well below that of industrialized nations
and the word average, meaning that there is scope for rapid expansion. At the same time, India
already imports over 70 percent of its crude oil requirements, with its oil import bill being close to
USD 90 billion in 2008-09.

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In addition, some of the existing oil and gas fields were experiencing a decline in their production
since they had already been in production for several years and were past their plateau phase. Given
this context, particularly the high import dependence, the New Exploration Licensing Policy (NELP)
was envisaged in 1997 (and operationalized in 1999) by the MoPNG, as part of its Hydrocarbon
Vision 2025, a landmark 25-year planning document.

These factors also meant that the issue of energy security was brought to the forefront of strategic
decision making and an urgent need was felt to augment the domestic supplies of oil and gas. In
addition to NELP, other efforts were made to address the need for achieving energy security such as:

1. Acquisition of Oil and Gas assets abroad, the latest being ONGC Videsh's acquisition of
Imperial Energy
2. Developing strategic storage facilities at identified locations
3. Exploring alternate sources of Energy, including Coal Bed Methane, gas hydrates, etc
4. Improving the recovery of oil and gas from existing fields through methods such as
5. Enhanced Oil Recovery (EOR) and Increased Oil Recovery (IOR).

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COMPANY ANALYSIS
I. FUNDAMENTAL ANALYSIS

Stock Information:

Sector Oil and Gas

Share Price Rs 343.10 as on 18.08.2010
Market Cap(Rs. Bn.) Rs 651.47bn
No of shares outstanding 1,897.3mn
Free Float (%) 24.99 %
Beta 1.0
52 week High/Low Rs 368.05/248.10
Avg. Daily Volume (BSE & NSE) Rs 1.78bn
Face Value (Rs.) Rs 10
BSE Code 532792
NSE Code CAIRN
Reuters Code CAIL.BO
Bloomberg Code CAIR IN

Shareholding Pattern:

Promoters 62.38
FIIs 10.59
MFs/FIs/Banks 7.60
Public 2.31
Others 17.12

a. Company Background:

Cairn India Ltd, is an Indian subsidiary of the Scottish energy giant Cairn Energy Plc. It entered India
with the acquisition of Australia based Command Petroleum Ltd. It started its operations in India with
the offshore oil and gas fields at Ravva in East India. Currently about 62% of CIL is owned by its
parent company. However, Cairn India is in talks with Vedanta over a sell-out of 50-60% of the
parent company’s shares to UK based metal and mining company Vedanta Resources.

b. Business Model:

In India, Cairn operates in the upstream segment, i.e., the Exploration and Production of minerals, oil,
petroleum, gas and related resources. Cairn, apart from its largest producing assets in Rajasthan
(MBA) has two significant producing assets: at CB/OS-2 in the Cambay Basin, off the Gujarat coast
in western India, and Ravva, located in the Krishna-Godavari basin off the Andhra Pradesh coastline
in Eastern India. CIL operates in a total of 11 blocks in India and Sri Lanka.

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Currently the major activity for CIL is the exploration and production in the Mangala, Bhagyam and
Aishwariya reserves in Rajasthan on a 70:30 partnership with ONGC. Production in the Mangala
reserves started in August 2009. The current production level is about 125kbopd which is targeted to
reach 240 kbopd by FY2012.

c. Competition/competitive risks:

The New Exploration Licensing Policy has been instrumental in getting private players to participate
in the previously public company dominated exploration and production of oil and natural gas. A lot
of private and foreign players have been actively participating in the bidding process for allocation of
acreage called blocks. Competition for CIL is restricted to these biddings in the subsequent NELP
bids. Companies are required to out-bid their peers in order to get an exploration license of their
choice. Thus, losing out on these bids is a major risk for the companies. In the last round of NELP,
CIL secured 2 blocks for its exploration activities.

d. Other risks:

Some of the risks that CIL may have to face in the future are:

 The poor quality of crude oil may make it more expensive for extraction and also difficult for
transmission, adding up to the operational cost
 Short supply of power and water to the reserves in Rajasthan could pose operational threats
 A global softening in crude oil prices can lead to a decrease in profit margins and
subsequently, earnings.

e. Financial Analysis:

Year ended 31 Mar FY07 FY09 FY10 FY11E FY12E

(Rs m)
EBITDA (%) 1.313 28.345 39.084 78.682 80.934
Net margin (%) -2.425 56.081 64.762 95.895 103.967
Dividend yield (%) 0.000 0.000 0.000 0.000 0.000
Net debt/Equity (x) 0.000 0.133 0.100 0.118 0.148
Net Working Capital -14.314 1420.922 198.030 389.320 1437.912
(days)
Asset turnover (x) 0.000 0.324 0.576 3.192 4.552
ROCE (%) 0.445 0.007 3.479 26.154 30.212
RoE (%) -0.084 0.005 3.153 20.117 25.253
EV/Net sales (x) 41.217 26.897 1.835 0.566 -2.378
EV/EBITDA (x) 286.370 38.513 2.859 0.521 -2.005
PER (x) -1699.933 43.696 6.225 0.864 0.546
Price/Book (x) 1.415 1.070 0.193 0.158 0.122

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f. Deal details: Cairn Energy Plc has entered into an agreement with Vedanta Resources Plc for sale
of 40-51% stake in its Indian subsidiary, Cairn India. The success of the 20% mandatory (as per the
Indian takeover regulations) open offer to minorities will determine the extent of stake sale by Cairn
Energy Plc. The all-cash deal is being executed at Rs405/share (US $8.66 as of August 13, 2010
closing exchange rate) wherein Rs355/share (US $7.59) will be towards the sale and purchase
agreement and the balance Rs50/share (US $1.07) constituting the non-compete fee. Thus, the 20%
mandatory open offer to the other shareholders (except Cairn Energy Plc) will be at the lower price of
Rs355/share, which is at 6.7% premium to the close price. Thus, the minority shareholders are at a
disadvantage in terms of receiving lesser compensation for selling their stake. The offer is subject to
the government approval. The open offer will be made through Sesa Goa. At the end of the
transaction, Sesa Goa will hold 20% of Cairn India, with Vedanta itself holding between 31- 40%.
Cairn Energy Plc has guided for transaction completion in 1QCY2011. Stake sale will fetch Cairn
Energy Plc a premium of 21.7% over the current market price. According to our understanding, deal
price reflects the long term crude oil prices of US $96.7/bbl.

The transaction will result in Cairn Energy Plc receiving cash consideration of between US $6,651mn
(for 40% stake sale) and US $8,480mn (for 51% stake sale). The final amount of the consideration
payable to Cairn by Vedanta will be determined once the open offer has closed and the number of
Cairn India shares subject to valid acceptance under the open offer is known. Thus, post the deal,
Cairn Energy Plc on a fully diluted equity base will hold a minority 21.6-10.6% stake in Cairn India.
The companies have also entered into a non-compete undertaking, which will cover the territories of
Bhutan, Sri Lanka, Pakistan and India, wherein for a period of three years, Cairn Energy Plc will not
engage in the business of oil or gas extraction, its transport or processing and any other business,
which competes with the business of Cairn India and its subsidiaries as at the completion date in any
of those territories. Cairn has also agreed to a non-solicitation agreement for a period of three years
with respect to any person who is or has been an officer or senior employee of the Cairn India Group
within a year prior to completion.

Cairn and Vedanta have also entered into two reciprocal put and call options in respect of the
difference in the number of Cairn India shares actually sold to Vedanta and 51% of Cairn India’s fully
diluted share capital on completion (for instance, if only 40% of Cairn India’s shares are sold, then for
the balance 11% (51% less 40%) the put and call option is applicable). One put and call option is
exercisable after July 1, 2012 and the other after July 1, 2013, in both cases at a Rs405/share (US
$8.66). Each option may be exercised to a maximum of 5% of the issued share capital of Cairn India,
as at the date of exercise of the option. The put and call options will ensure that a majority interest in
Cairn India can be sold to Vedanta. Cairn Energy Plc has agreed to give Vedanta a matching pre-
emption right over any subsequent disposal by it of any shares where such transaction would result in
the intended recipient obtaining more than 20% of the issued share capital of Cairn India.

g. Intrinsic Value:

Cairn is richly valued at the CMP at EV/boe of USD30/bbl versus global average of USD10/bbl.
However, I feel that the company prospects are good and thus this high valuation is justified. The
shares are rightly priced at Rs 343.10.

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g. Outlook and Valuation: I think the transfer of the ownership of Cairn India from Cairn Energy Plc
to Vedanta Resources plc is unlikely to have any repercussion on the company’s financials. However,
the key risk associated with the deal is Vedanta’s lack of expertise and experience in managing the
asset portfolio as it is a new player in the segment. Also, Cairn Energy Plc’s superior exploratory
capacities will also be a matter of deliberation. However, at the current juncture it is premature to
assume the deal to have an adverse impact as Cairn India’s current management would continue to
run the business in a professional manner. With regards to the open offer, I believe that returns to the
current investors will be quite similar in case of tendering the share in the open offer or otherwise. I
recommend a Buy on the stock.

On the fundamental aspect, the development work at the Rajasthan block is progressing well, with
production from Train-I, II and III and pipeline for crude evacuation already commissioned, while
Train-IV and the marine facility is likely to be commissioned in CY2011. The development work
undertaken by the company highlights its superior execution skills. Cairn India has already tied up
volumes of 1,43,000bpd with four buyers, viz. RIL, IOC, Essar and MRPL, which puts to rest
concerns about users of the waxy crude produced from the Rajasthan field. In the absence of any
major discoveries and the company’s focus on development of the Rajasthan block, Cairn India’s
stock price is likely to be driven by the direction of the crude oil prices, news flow associated with the
developmental status and ramp up of sales. In the past, the CIL stock has demonstrated strong
correlation with the crude oil prices, which we expect will continue going ahead too. Thus, in spite of
the subdued outlook on oil prices, I believe that the stock will benefit from the positive development
updates from the Rajasthan block.

TECHNICAL ANALYSIS:

First let us see the share price movement of this company for the past three years through a line
diagram.

Date Closing price of stock Date Closing price of stock

01-09-2010 328.25 01-06-2009 232.8
02-08-2010 332.5 04-05-2009 231.85
01-07-2010 333.05 01-04-2009 185.6
01-06-2010 304.1 02-03-2009 183.9
03-05-2010 299 02-02-2009 166.45
01-04-2010 314.95 01-01-2009 163.25
02-03-2010 304.85 01-12-2008 171.6
11-02-2010 266.5 03-11-2008 141.6
04-01-2010 290.25 01-10-2008 128.95
01-12-2009 282.5 01-09-2008 215
03-11-2009 277.9 01-08-2008 247.75
01-10-2009 262.5 01-07-2008 241.3
01-09-2009 261.5 02-06-2008 274

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 03-08-2009 264.1 02-05-2008 285.15
01-07-2009 236.9 01-04-2008 247.9

Line diagram of stock price

350
300
250
200
150
100
50
0
0 0 0 0 0 9 9 9 9 9 9 8 8 8 8
2 01 2 01 2 01 2 01 2 01 2 00 2 00 2 00 2 00 2 00 2 00 2 00 2 00 2 00 2 00
9/ 7/ 5/ 3/ 1/ 1/ 9/ 7/ 5/ 3/ 1/ 1/ 9/ 7/ 5/
/0 /0 /0 /0 /0 /1 /0 /0 /0 /0 /0 /1 /0 /0 /0
01 01 03 02 04 03 01 01 04 02 01 03 01 01 02

The above line diagram shows that there has been an overall steady trend in the movement of share
price of Cairn India Ltd for the three years starting April 2008. The largest fall had been at October
2008 which can be attributable to the financial crisis that gripped the world. Post 2010, we can say
that the support level for the stock has been around Rs. 300 and resistance level at Rs. 325.

Support and Resistance Analysis

Since this analysis is specific for a particular day, I have taken the trading day 10th September 2010
for this analysis. The results derived are as follows:

Support Price Resistance Price

Support1 323.9 Resistance1 330.5
Support2 321.5 Resistance2 334.7
Support3 317.3 Resistance3 337.1

Moving Average of Cairn India Ltd.

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 Current Price 326.3

Three Days 329.667

Five Days 332.2

Ten Days 334.065

Fifteen Days 337.727

Twenty Two Days 338.855

Thirty Days 339.353

Fifty Days 329.178

Hundred Days 313.457

Two Hundred Days 297.253

Simple Moving Average Chart for the period 9th March 2010 to 9th Sept. 2010

More Technical Indicator

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 Name Value

Stochastic D Fast 4.83374

Stochastic K Fast 1.5873

Stochastic D Slow 9.0332

Relative Strength Index 34.5195

Bollinger Band Up 354.052

Bollinger Band Middle 339.092

Bollinger Band Low 324.133

Candle-stick diagram for the period September 2009 to September 2010:

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