Karvy Stock Broking has given a buy rating on Cairn India (CIL) from outperformer to buy with a target of Rs 287 in its October 6, 2008 research report.

The Report

Cairn India (Rs197)

BUY - Price Target: Rs287

Cairn India's (CIL) stock price has been mirroring the downtrend in crude oil price. The stock has come down from Rs 237 to Rs 197 in tandem with the crude oil price tumbling below US$100 per barrel.

Though it is a fact that the crude oil price will have a direct bearing on CIL's financial performance and stock price, it is of little significance to the company as of now because it is due to begin production in the second half of CY2009. We also believe that focusing on the company's realization for crude oil in rupee terms is better way of analyzing than
merely looking at the US dollar price of the commodity. The Indian rupee has depreciated from Rs 44 to Rs 47 during the last month,which has almost offset about 10% decline in crude oil price in dollar terms.

In our opinion, the recent fall in the CIL stock offers a good buying opportunity as it factors in much lower crude oil price in rupee terms than the current one. We have estimated the Brent crude oil price at US$90 per barrel in CY2010 and applied 10% discount to the same to derive the price realization for CIL. The 10% discount has been assumed as the quality of the company's crude oil is likely to be slightly inferior to that of Brent crude oil. However, the 10% discount could be on the conservative side.

As far as rupee-dollar exchange rate is concerned, we have assumed it at Rs 44 / USD. It translates into Rs 3,500 / barrel as realization for CIL's crude oil. As against that, the realization could move up to Rs 4,200 / barrel if we assume only 5% discount to the Brent crude oil price and the current rupee-dollar rate of Rs 47 / dollar.

We believe that the market has become overly negative on CIL due to  the recent fall in crude oil price in dollar terms. We maintain our valuation of CIL (including DCF of Rajasthan block) at Rs 287 and upgrade our rating on the stock from Outperformer to BUY in view of the recent slide in the stock price.