Recommendation Review: Cairn India

We had recommended Cairn India shares at a price of Rs 310 in Volume 28 Issue No. 6. The government approval for its exploration plan was one major reason behind our recommendation. The plan also had lifted the mood on the stock. Besides, all the brokerage and research houses have maintained a 'buy' recommendation on the stock.

The stock from our recommendation is down by 6.84 per cent. Recently, the company has announced a dividend of Rs 6.50 per share which, on the recommended price, would give a yield of 2.10 per cent. This curtails the loss to 4.74 per cent. The dividend would be payable by July 2013.

After the commencement of exploration in its Rajasthan Block, Cairn India has discovered oil in the first exploration well (Raag S-1) which it drilled in April 2013. It has already announced its plans to drill 450 wells in the Rajasthan block in the next three years. This includes 100 Exploration and Appraisal (E&A) wells and some more development wells. Further, the company has also increased its gross reserve estimates from 5192 Million Barrels of Oil Equivalent (MMBOE) in March 2012 to 5641 MMBOE in March 2013, and this is very encouraging. All these developments indicate success in the exploration plan.

The prolific Rajasthan block has been producing oil at the rate of 170000 -175000 Barrels of Oil Per Day (bopd). Cairn India has said that for the next year, the production rate from the block would be between 200000-215000 bopd. This means that the FY14 revenues would further rise due to the increased production levels. The rise in the production can be attributed to the increased reserves as well as commencement of oil production in the Aishwariya field. Considering these facts, we remain positive on Cairn India and suggest a 'hold' on the stock.