The IBS Times- 166 Issue

Rise of MODIFICATION- India Inc. Welcomes the New PM of India

THE IBS TIMES May 2014, Issue No. 166, Volume No. II

ABENOMICS Can the “three arrows” of the Japanese PM hit bull’s eye to bring Japan’s economy back on track?

FinStreet, IBS Hyderabad

What’s Inside 2 Letter from the Editor 3 Flipkart weds Myntra 5 India’s Economy Third Best- Really?

6 Cover Story- Japanese Economy 9 The Ukrainian Crisis 10 Industry Analysis- Realty 12 MODIfication 13 Market Watch 14 Vriddhi’s Corner

Letter from the Editor Dear Readers, Greetings from Team IBS Times !

We would like to thank you for an overwhelming response to the 165th issue of The IBS Times. It has immensly motivated us and we will continue to thrive for perfection.

Last week the world watched closely how Indians unite when it comes to judging and making a collective decision for the betterment of the country. The stock markets were extremely bullish all this while and large number of companies saw their stock prices touching year high levels. The new government will have an uphill task in living up to the expectiations of everyone. With over 300 seats in the lower house of the Parliament of India, the ruling party not only has much more flexibility in taking decisions but it should also make use of its stable and strong position to implement the policies all across the nation while improving trade relations with other countries.

This issue of The IBS Times has the much talked about Japanese Economy as its cover story. We have also discussed about the prospective merger/acqusition of Flipkart and Myntra which despite of sales worth billions have not been able to break even yet. The issue also shares insights on the recent report by World Bank stating India as third best economy. With Russia going all out over Ukraine, we have put in our thoughts on that as well. This issue’s industry focus is on Realty Sector and we have also discussed in brief the economic tasks in hand for Narendra Modi. The magazine covers an exhaustive report from investment point of view on CAIRN India Limited by Team Vriddhi Research.

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better !

Chaahat Khattar

“If you owe ten pounds to the Bank of England, you get thrown in jail, but if you owe a million pounds, they invite you to sit on the Board” - Philippe Ries

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Opinion

Flipkart weds Myntra 2012, Flipkart had acquired letsbuy.com, a portal selling electronic products. This consolidation bifurcated the market between high-end shopping targeted at upper middle-class consumers who were looking at faster delivery and the mass market of unstructured categories and local brands catering to price-conscious consumers.

Indian e-commerce biggie Flipkart has approached crosstown rival Myntra with a merger deal propelled by the larger, common investors behind the two Bangalore based e-tailers, people directly aware of the matter said. This development unfolded even as Myntra was sealing a $50-million (around Rs 300 crore) fund-raise from a consortium of investors led by Premji Invest. With the reports of the merger of these 2 giants coming along investors are are going bonkers and are pushing for consolidation and merger of these 2 companies. The proposal is being pushed forward by their common investors Accel Partners and Tiger Global.

Most say the merger will be a success story. Here are some pros to the merger : • Since both players are be keen to keep their individual brand identities, the key advantage from the merger will be the synergies at the back end.

• The two can share their consumer base and logistics. The real savings with the merger would be at the back end.

This potential consolidation play at work would progress only if Flipkart and the two common investors address concerns of the Myntra promoters and the smaller investors. Tiger and Accel together own 53% shares, while IDG Ventures and Kalaari have a combined stake of 28%. Bansal owns 9% leaving the rest with other cofounders and staff. In Flipkart, the two common investors (Tiger & Accel) together hold around 40%.

• Common investors in Flipkart and Myntra have been pushing for a merger, according to sources.

Instead, Myntra raised Rs 300 crore from Premji Invest and other investors recently. Consolidation in todays market is a pre requisite given the aggressive promotional strategies adopted by amazon India.

• It is also speculated that amazon will be tying up with Indian postal services in the near future. This will not only increase their visibility but will also make them available in the most remote areas of India. In order to combat and battle amazon India, Flipkart and Myntra both can use their top notch delivery services. Not only this but with time, they can enhance features such as that of return policies, warranties extension and many more.

Flipkart is an online shopping website popular for products like books, electronics, stationery supplies, and lifestyle. By merging with Myntra, online retailer of fashion and casual lifestyle products, Flipkart will not only expand its online shopping experience to customers but will also with time build new consumers who are fashion conscious.

Flipkart aims to achieve $1 billion sales by next year. It raised $360 million last year from investors including Morgan Stanley Investment Management, Dragoneer Investment Group, Belgium-based investment firm Sofina, and Vulcan Capital.

Myntra on the other hand, is one of India’s biggest online clothing retailers has been in talks with various investors to raise around $50 million, including Azim Premji’s Premji’s Invest.

As competition heats up in India’s growing online market, if Flipkart and Myntra agree to merge, Jabong, Amazon, Snapdeal, homeshop18 will be seen battling for market share. This isn’t Flipkart’s first inclination towards acquiring a new website. In 3

• Secondly, if Flipkart does enhance the customer experience for apparel, they would have to do the same for other categories to maintain brand consistency, which does not make sense and can be a costly affair.

However, where there is a Yin, there is a Yang.

• Flipkart, who currently struggles to be profitable, the merger is about strengthening its fashion category, which can be the highest gross margin business for them in future. For Myntra, it gives them a strong backbone needed to scale up their business faster. That's where the reasons for an alliance start and possible end as well making the scope of this merger very narrow.

• Myntra has in the recent months has managed to enhance and fine-tune the customer experience for apparel producing high quality fashion content that assists sales, one of the reasons for its success. In case of a merger, this could be toned down significantly to benchmark it with Flipkart's customer experience, which is generic but works well. Letting go of it would simply imply letting go of the Myntra brand and what it stands for today.

• Thirdly, Myntra in it’s advertisments and in its approach has been vocal about its aspiration and vision to be India's largest fashion and lifestyle retailer something they would have to give way to Flipkart's aspiration and vision to remain and sustain as India's largest internet based retailer. This may not always be aligned to Myntra's vision and would certainly result in compromises that Myntra would have to live with.

• Both these giants are redefining themselves into hybrid models (between e-commerce and marketplace). This is majorly driven by their need to comply with FDI norms for investment in online businesses in India. Importantly, it allows them to scale up their business faster with decrease in inventory costs, however, with fresh challenges in creating a consistent customer experience.

Judging by the pros and cons of this merger, I feel like changing the saying an old English saying- the grass is always greener on the other side, the truth is that the grass is always green on the both the sides.

So will this merger prove to be a major benediction for these 2 giants or is it a step towards an imminent crisis, only time will tell.

• Differences in the brand DNA of Myntra and Flipkart, which if combined could result in an identity crisis for both, though more for Myntra.

The key difference between Flipkart and Myntra is how they define the brand experience for their customers. It is a complex fusion of online buying experience (web portal, mobile), human interface over phone and email for customer service and the delivery experience at the customer's doorstep. The most important customer experience, however, is the product.

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• Myntra's focus is fashion and lifestyle and in this category, two of the most important experiences happen to be online buying and the product itself.

Both demand specialized attention and enhanced experience for the apparel category, something Flipkart will find very difficult to focus on without perceptibly diluting their other leading categories.

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Akshay Gupta

Economy

India’s Economy Third Best- Really ?

A recent study done on assessing world economies based on “real living cost” conducted by the World Bank has ranked India No.#3, below the U.S and china ranked in the 1st and 2nd position respectively, followed by Japan, Germany, Russia (ranked in that order). This is extremely good news for India as India is considered a developing nation with low GDP growth rate since in the past 5 years and many economists have criticized India for not doing “enough” to implement long term reforms and thus control its increasing current account deficit.

prices in the country are still well below those in advanced economies.

However the International Monetary Fund (IMF) report depicts a different picture. According the IMF report, India is ranked 12th on the list of global economies.

Mostly all countries believe that the globally accepted form of measuring the growth and strength of a countries economy is by measuring the GDP. Countries estimate their GDP at national price levels and using their local currency, which according to analysts, while studying them at a macro level isn’t comparable. To be compared, many senior economists say that they must be valued at a common price level and expressed in common currency. Therefore after taking into the exchange rate fluctuations, (by converting all local currency into the UD dollar), many countries including India were hit badly due to the weak exchange rate. As well as one must take into account that with $1.00/-, a consumer can purchase more in some countries than they can in other parts of the world.

PPP is particularly important in the study of poverty levels and quality of life across countries as it adjusts for price changes across the national economies. For example, PPP is used by the World Bank in measuring its poverty threshold of $1.25 per day per person. It is a known fact that a US dollar can buy more in some countries and very little in other countries. PPP-based comparative analyses allow for comparisons between economies.

Using the PPP (purchasing power parity), as a scale of measuring international comparisons between countries, It is gradually being accepted as one of the important factors in measuring the development of a nation. This is because countries measure their GDP based on their own national currency, analysts believe that countries must be compared on a common price level and be measured on a common currency.

This statistical data offered by the World Bank has indeed given many economists and other analysts another way of looking at India’s development.

Unfortunately, India the GDP per capita is ranked 127th out 199 (as per the total number of countries covered in World Bank study). This is because India still has a large population who are living within means below the minimum standard of living and therefore are considered poor.

The last time the World Bank conducted this study was in 2005. At that time the rankings showed a very different picture. India was ranked at 10th place. But according to this recent study, the Indian economy in 2011 in terms of PPP had grown $5.75 trillion to surpass Japan who had grown to $4.37 trillion. The World Bank explains this higher ranking and methodology used by saying that even though India has a high prevailing inflation rate, the

Unfortunately in recent times, the focus on development in India has been snowed under the evil ills currently taking the lime light such as high inflation, corruption, stagnant growth and poverty.

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Nikhil Acharya

Cover Story

Japanese Economy- A Quadrillion Debt Bomb

Mathematics is always fun and it is even funnier if you explore something new in it. Japan recently did.

Japan’s economy has been ballooning so much (catch the sarcasm in it) that it took Bloomberg not much time to introduce a term we did not hear of before- Quadrillion. In August 2013, Japan’s public debt crossed 15 zeroes mark which looks like 1,000,000,000,000,000 Yen. To make things sound a bit sophisticated (possibly not as much embarrassing), Bloomberg went on to term this number as a 100 Trillion which is definitely not as much fun to sound.

and tsunami in 2011 bounced back and The Tokyo stock market has surged about 65 percent since last fall. In the second quarter, the economy expanded by 3.8 percent, which is faster than other developed economies and the moderate inflation which is necessary for an economy to grow is back.

With all these rosy numbers and accolades around, it is so hard to believe that such a nation is struggling and is just blowing off recession and financial meltdown every other day. Japan’s public debt is ever increasing. It is 233% of the Gross Domestic Product (“GDP”) which is worse than US’s 80% and even worrying than Greece’s 155% .

As per Organisation for Economic Co-operation and Development (“OECD”), The economy of Japan is the third largest in the world by nominal Gross Domestic Product (close to USD 6 Trillion), the fourth largest by Purchasing Power Parity and is the world's second largest developed economy. This little nation (only by virtue of its size) is world's 3rd largest automobile manufacturing country (Toyota, a Japanese automobile major is world’s biggest automobile company), has the largest electronics goods industry (Sony Electronics is a market leader in several segments such as television, gaming consoles, commercial appliances, cameras etc.), and is often ranked among the world's most innovative countries leading several measures of global patent filings. Japan is the world's largest creditor nation, generally running an annual trade surplus and having a considerable net international investment surplus. As a matter of fact, United States of America owes Japan around USD 1.1 Trillion making Japan the second largest lender to USA, just couple of billions short of People’s Republic of China. Japanese economy after facing a short-term recession as an aftermath of disastrous earthquake

There are several reasons for this position of Japan.

The most important being the stimulus packages Japan’s government has been announcing in the recent past. Almost after every quarter the government has been announcing multi billion dollar stimulus packages and then the Bank of Japan (Central Bank of Japan) announces separate stimulus packages like the USD 117 Billion one which it announced in the beginning of 2013. This is too much for monetary easing and can lead to financial institutions becoming depended upon the public money.

Economic recessions have impacted Japanese economy severely. Exports have fallen down and country has moved from trade surplus to trade deficit. Going back to the point of stimulus packages, the investors lose interest in such an economy which has pushed down the value of government bonds in Japan hammering the value of Japanese Yen (“JPY”) and as JPY gets badly affected, the oil import bill for Japan has increased the net import bill.

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The demographic situation is also a reason to be blamed on for Japan’s economic catastrophe. This is more of a natural factor leading to unwanted consequences. The young population in Japan is low, birthrate is low, death rate is high (Japan is losing close to a million people every year), immigration is low but number of Japanese people over the retirement age is very high (The average Japanese farmer is 66 years old, his farm is less than five acres in size, and he is the beneficiary of his share of about $50 billion of annual government subsidies ) which puts pressure on the social security system of the nation.

Japan, knowingly or unknowingly Japan has been printing more currency (increasing money supply in the economy) in the recent past in order to increase inflation. By doing so Japan has planned to increase consumption thereby brining GDP on track.

The third arrow talks about structural reforms in the economy. To help unlock that money, Abe has aimed his third arrow of economic policy at growth-inducing reforms from trade liberalization to steps elevating the participation of women in the workforce.

So far, the Abenomics has been influential but definitely not revolutionary.

Now Japan has been caught up in the vicious circle of debt. As much as the government has raised, it is required to pay more as interest payments, as a result of tsunami, the spending on public works have increased leading to more borrowing and also as more money is being spent on social security, government needs more funds again leading to higher interest payments on increased borrowing .

The growth rate is positive and so is inflation but that could be short term and the three arrows might not be sustainable in the long run. Japan for the first time since 1997 has also increased sales tax from 5% to 8% which was expected to generate close to USD 8 Trillion in revenues for the government but at the same time to cushion it up, Abe announced a USD 5 Trillion stimulus so the net realizable benefit of USD 3 Trillion to the government seems like peanuts and questionable. Also, Japanese firms might just hit back with lower profits to pay lower taxes that can lead to worst-case scenario. Will Japanese exports really increase over the coming months and years? In a theoretical, static world, maybe. But in the real, dynamic world, not a chance, at least not in a sustained way. Why? Two main reasons: First, strong yen during much of the time period before 2013 caused traditional Japanese exporters to move production facilities overseas to much cheaper areas. As a result, many “Japanese” goods now are actually Chinese or Korean or Filipino or Vietnamese. Therefore, the lower yen does not increase shipments of these products from Japan. In fact, many of these goods now are imported by Japanese retailers at increased prices, reflecting the yen’s decline. Other nations will retaliate against a lower yen.

Someone might wonder that if the situation is so bad in Japan then why we are not forecasting a US or European crisis like situation for Japan? The answer is very simple. Most of Japan’s debt is internal unlike US or European nations. In numbers, Japan owes USD 3 Trillion to external sources which is less than its GDP. So a breather for Japan is that the money is flowing internally only and the government ends up paying interest to its own banks and it does not have to go through the real test of bonds markets for raising funds from external sources.

In order to bring the atrocious budgetary deficit under control, Japan under the leadership of Prime Minister Shinzo Abe have taken three primary steps so far which journalists refer to us “Three Arrows ” or “Abenomics”. One we have already discussed about giving financial stimulus and infusing capital into the businesses. The other one deals with monetary easing. With due help from Bank of 7

wonder the government is using all its arsenal in order to bring the economy back on track but more than that it must know that Japan is a developed nation and the industries it has must be sustainable enough to create cushions for themselves and letting people have more income enabling them to go for shopping and boost the economy.

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They will monetize their own debts, increasing the supply of their own fiat currencies, driving down those currencies’ values . If Japan opts for cuts such as cut on its spending or social welfare, it will not help much as that will reduce demand in the system and it will be like a situation where a struggling firm multiplies its revenue by sacking thousands of employees or by introducing austerity measures which provides a cushion for short run but in the long run such firms end up being acquired or filing for bankruptcy.

Now the point of discussion is that what Japan should do? It seems like it is into a hole it cannot really get out of. The real thing is that yes it is true Japan is in real mess but what it can do is that try not to dig the hole deeper and instead try to refill the same and Japan itself will come to a better position. Growth will be the key to Japan’s rebound. Japan will need to focus more on multiplying its GDP growth, ensuring inflation in the economy and controlling upon the stimulus packages it has been giving. Japan enjoys the fact that it can control the interest rate it has been paying on debt as most of it is internal so it can take up the risk of engineering a higher inflation oriented economy. This will further help Japan in reducing Debt-GDP ratio which will make Japanese Government Bonds more lucrative to buy thereby generating more of external money supply in the economy. Government should promote tourism, immigration and bring back the industries it has lost when JPY was becoming stronger.

In a nutshell, Japan has an interesting time ahead. In 2020, Tokyo will be playing host to Summer Olympics and for that Japan needs to have a sustainable and extremely stable economy. No 8

Chaahat Khattar

Global Diplomacy

The Ukranian Crisis to stop the sanctions. “More sanctions would put Russia into a deep recession, so whether you’re selling consumers goods, technology or in the financial sector, it’s not good,” said Lasov, global head of advisory and analytics at Frontier Strategy Group, a consulting firm for multinational companies. Also the situation is expected to get more serious, when multinational companies might pull out of the country, which they probably wouldn’t do in an ordinary recessionary situation.

While the world watches the intensifying crisis in Ukraine, stockholders and world leaders are considering how the flux could shake the global economy. Ukraine is a long way away from stability after suffering a violent change of government, an invasion of a portion of its territory by an immensely bigger and more powerful neighbour, and—indeed economic contraction.

The crisis continues to expand from a local problem to a global issue. Further sanctions and conflict would bring uncertainty to global markets and may pull down a slowly recovering Europe while endangering billions of dollars from multinational companies. The unrest could have consequences far beyond the region.

Currently, global interest rates are still low from a long-term perspective, while Europe is in the slow, painful process of rescuing its own economy.

For Russia and Ukraine, the future looks depressed.

Despite help from a $17 billion bailout from the IMF, the Ukrainian economy is going through a balance of payments adjustment, and even if the crisis dissipates soon, the government is looking at constricted spending this year.

Meanwhile, the threat to Russia’s economy is “greater than many think,” according to Julian Jessop, chief global economist at Capital Economics. Its stock market is down 20 percent this year, and the IMF recently downgraded its forecast for GDP growth from 1.3 percent to 0.2 percent for 2014. But the Russian economy affects more than one country. If the situation worsens, the European Union could be at risk. Though Europe does have the advantage of alternate trade partners and the use of strategic reserves, making a transition amid high oil prices would be challenging.

Russia and Ukraine are important suppliers of energy and other commodities such as palladium, nickel, titanium and grain. The pain could be felt in supply chains of companies that use these materials, or other manufacturing in Russia.

Companies based in Europe will have problems with their supply chains, especially those with manufacturing plants in Russia. Local partners won’t be able to access finances, exports could stall, all while European consumers feel the pinch of high oil prices.

Automakers in Germany would be heavily affected, for example, since much of their manufacturing takes place in Russia. It’s no surprise that Angela Merkel and German businesses are urging the U.S.

Consequently, even U.S.-based companies with operations in the country, such as Caterpillar, Citibank and Pepsi, may feel the pressure. But economists say the American economy won’t be as hard-hit as its counterparts overseas. Indeed, uncertainty in global markets could boost demand for U.S. government bonds, along with other safe havens such as German, Japanese and U.K. bonds, along with commodities like gold.

“Russia would remain the biggest loser on economic terms, as well as politically -- an invasion would drive other former satellites to build closer ties with the West.” Some economists think Asian economies could benefit as Russia seeks new trade partners. But so far, China has been careful about its public statements on the matter.

Lastly, any economic sanctions would have more significant impact on the European and American economies. But given the volatility of the entire situation, it’s tough to predict how any events will affect the global economy with any confidence.

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Vanika Sharma

Industry Overview

Real Estate Rental Rates Location Mumbai NCR Chennai Kolkata Bangalore Pune Hyderabad Ahmedabad Kochi Lucknow

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Cost (INR cr) ~64,000 ~4,67,000 ~64,000 ~40,000 ~1,09,700 ~30,000 ~75,000 ~26,000 ~20,000 ~33,000

Nearly 70& of the total retail space is concentrated in Mumbai and NCR. There would be tremendous demand for organized retail space in other cities apart from Mumbai and NCR. Retail estate demand is strongly coupled with the economic scenario. External conditions like recession impact the supply and demand for real estate space.

Planned Real Estate Projects

Key Drivers of Real Estate: • Rise of Tier-2 and Tier- 3 cities; • Interest of Global Funds in the Indian Real Estate market; • Easy access to home loans for retail consumers; • Expected growth of the organized retail segment; • Increased Focus development;

on

Urban

Infrastructure

• Favourable demographic scenario over the next two decades; • Shortage of housing space in major commercial centres; and • Rising Incomes and Urbanization Levels.

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Key Risks Faced by the Industry: • Rising Project costs due to inflationary pressures; • Spiraling wage inflation in India; • Lack of skilled project management professionals; • Grim outlook for retail lease rentals post the financial crisis; • Major realty firms have large amounts of existing debt; • Margin pressure on commercial real estate; • Poor corporate governance practices in Indian realty companies; and • Procurement of land in major cities a challenge.

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Nishtha Behl

Economy

MODIfication After stellar performances delivered by NDA,whose whole and sole reason was none other than Narendra Modi,the time has come for the dream,which every indian, whoever was Modi's supporter has aome true "Abki baar Modi Sarkar".

Sensex which is considered as barometer for any economy has already started showing signs for positive sentiments as it reached at the pinnacle of 25,000 mark. But still,the economy which has been sluggish from past few years is asking for revival from Modi.

deficit is 4.8%,inflation is 8.5% and economic growth is less than 5%. Also, foreign relationship will also play a pivotal role for the trade relationships with another country which can help in bilateral trade agreement which in turn can help infusion of FDI's & FII's.Also, Youth has also some expectation from Modi,regarding employment opportunities. Earlier through his Gujrat model of development, Modi has raised the expectation of businessman and entrepreneurs they are also celebrating Modi's triumph.

What this India wants?

Conclusion

After the historical triumph of NDA in the 16th Lok Sabha election,there is a torrential flow of emotions that Modi will be prove as a messiah for the common man. Issues like black money, unemployment, black money has topped the list nevertheless economic issues such as stagnancy of economy, current account deficit and low FDI & FII investment in the economy are some of the issues which are to be answered by newly elected Modi government. On 21st may 2013, when Mr.Narendra Modi will be sworn as newly elected PM of this nation,he will have this herculean responsibility to overcome this nation from these economic demons.

Finally, Modi has a mammoth role to play in order to revive the economy of the country but as some one has really well quoted that "it is very enigmatic the right road" it's upto Modi that how will he be able to deliver the promises. Through some of the stern decision and good economic policies decision alongwith good foreign policies can make a good combination in order to surpass all those problems.

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India's Present Economic Health and it's Remedy Though this newly elected government may prove beneficial for India,but it is too early to say that Modi is panacea for country's all economic and financial diseases. However the veteran has proved his prowess in the perfect administration of Gujrat from last 15 years that he is above all suspicion.

The Indian economy is experiencing a lot of trembles from quite a some time. Current account

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Atharva Solanki

Market Watch

Gainers and Losers NSE NIFTY

BSE SENSEX

BSE GAINERS (MONTHLY)

BSE LOSERS (MONTHLY)

NSE GAINERS (MONTHLY)

NSE LOSERS (MONTHLY)

Source: Yahoo and Rediff Finance 13

Vriddhi’s Corner

Company in Focus- Cairn India Limited Industry: Oil and Gas

Market Price: 353

Market Cap. (Rs Cr.): 65,069.99

Industry Overview The oil and gas sector can be broadly classified in following Segments: Upstream Segment- this deals with Exploration and Production, where companies like ONGC (State Owned), CAIRN, RIL have a majority stake.

Midstream Segment- which deals in Storage and Transportation, companies like GE Energy, CAIRN, IGL, GAIL have a wide network in India. Downstream Segment companies are often regarded as Oil Marketing Companies, they are responsible for Refining, Processing and Marketing some of the companies which are prominent in this segment are IOCL, BPCL, HPCL. India is the World’s fourth largest consumer of Energy and Oil & Oil Equivalents, which is expanding at CAGR of 3.2%.

For the process of Upstreaming, Directorate General of Hydrocarbon is responsible for discovery of exploration blocks, opening of unexplored areas for future exploration.

After a potential field is located, process of inviting upstream companies to explore “proved and probable fields” starts. This is done as per New Exploration Licensing Policy.

Till early 1990s national oil companies were provided the blocks for exploration on nomination basis. From 1999 onwards, New Exploration Licensing Policy ensured that equal opportunity is provided to public, private and foreign players to participate in exploration activities.

Company Overview Cairn India, headquartered in Gurgaon is one of the largest independent oil and gas exploration and production companies in India. Cairn India operates more than 25 per cent of India’s domestic crude oil production. Also, along with its JV partners’ account for more than a fifth of India’s domestic crude oil production. To date, Cairn India has opened 4 frontier basins with over 40 discoveries, 28 in Rajasthan alone.

The main business is Up-stream. That is exploration.

Management: Chairman, Non Executive Director: Mr Navin Agarwal (VEDANTA GROUP) Interim Chief Executive Officer

: Mr P Elango

Shareholding Pattern:

Source: http://www.cairnindia.com/investors/shareholding-pattern 14

Financials: P/E

8.73

Book Value

178.01

Div (%)

115.00

Industry P/E

8.88

EPS

39.01

Face Value

10.00

Results for Q3(FY2014): •

Net Sales increased to Rs499, 998Lakhs for Q3(FY2014), as compared to Rs427,761Lakhs in Q3(FY2013).

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Whereas, Net Profit decreased to Rs288, 404Lakhs, as compared to Rs315,611Lakhs last year for the same quarter. This was due to higher losses incurred by foreign exchange fluctuations.

Company’s Assets: 1. Krishna-Godavari Basin: KG-ONN-2003/1 (Cairn India has 49% participating interest) Cairn India, along with it’s JV partner ONGC plans to initiate a two well appraisal programme. The appraisal drilling programme is designed to help evaluate the size and commerciality of the discoveries.

2. Krishna-Godavari Basin: KG-OSN-2009/3 (Cairn India has 100% participating interest) India has received conditional approval to initiate petroleum operations in 60% of the block area.

Cairn

3. Mumbai Offshore Basin: MB-DWN-2009/1 (Cairn India has 100% participating interest) The planned acquisition has been deferred due to denial of clearances from the Ministry of Defence. Cairn India has received conditional approval to initiate exploration activities.

4. PKGM-1 Block (Ravva field), Krishna- Godavari Basin, Eastern India (Cairn India has 22.5% participating interest) 5. CB/OS-2 Block, Cambay Basin, Western India (Cairn India has 40% participating interest) 6. Mannar Basin, Sri Lanka: SL 2007-01-001 interest)

(Cairn India subsidiary has 100% participating

7. Orange Basin, South Africa: ‘Block 1’ (Cairn India subsidiary has 60% participating interest) Rajasthan Block •

This block is spread over an area of 311 km^2 in Barmer District, Rajasthan.

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It is divided into three “Development Areas”. Named as: – Development Area I – Development Area II – Development Area III 15

Fields/Development Area

Development Area I

Development Area II

Development Area III

Mangala

Bhagyam

Kameshwari

Aishwarya

Shakti

West Fields

Raageshwari Saraswati Currently, five of the above mentioned fields are producing. They are: Mangala, Bhagyam, Aishwarya, Rageshwari and Saraswati. They total output as of March 2013 out of these five fields was 175000 barrels oil equivalent per day(boepd), it rose up to 190,881 boepd by the end of Q4(FY2014) Few Facts: •

Average daily gross operated production in FY2013 was 205,323 barrels oil equivalent per day(boepd), this rose to 224,429 boepd (Q4-FY2014).

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During the Q4(FY2014), in Rajasthan infill drilling continues across all major fields and has driven a 13 percent increase in the gross operated production rate to 190,881 boepd

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As of March 2013, Gross Proved and Probable Hydrocarbons for Mangala, Bhagyam and Aishwarya blocks was at 1Bnbbl.

Operations: •

CAIRN India is mainly in Oil & Gas Exploration.

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Presently, 5 fields are producing:- Mangala, Bhagyam, Aishwarya, Rageshwari and Saraswati.

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From these 28 discoveries have been made(till March 2013) in Rajasthan

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As on 31st March 2013, Gross Proved&Probable Hydrocarbons Initially In Place for the block stands at 4.2Bn boepd.

Customers: •

CAIRN India is mandated by the government to sell oil to state refiners. The government identified Indian Oil Corp. Ltd and Hindustan Petroleum Corp. Ltd are the buyers of oil which is transported by CAIRN India.

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RIL is the first private player with whom CAIRN India has sorted an agreement, with permission from Government of India.

Valuation: 

Discounted Cash Flow

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CAPM: Rf=8% Rm=19.81%(April2009-March2014) Beta= 0.79 Re=Rf+Beta(Rm-Rf) Re=17.37% Actual Return (April2009-March2009) for CAIRN= 16.28%. This is less than the theoretical value.

Peer Comparison: ONGC

CAIRN

GAIL

LTP

384.95

340.65

409.40

Market Cap(RsCr)

329,343.59 65,069.99

51931.46

Sales

82,985.94

9,200.98

47,522.69

Net Profit

20,925.70

14,746.77

4,022.20

Total Assets

124,453.22

34,017.36

32,592.32

P/E

13.27

8.73

11.60

EPS

24.07

38.25

31.70

Technicals:

Bollinger Band shows moderate buying, in spite of some buying the stock could not move up substantially; whereas it’s peers were trading at greater heights. RSI (50.98), it is not considered to be a good number to enter the stock. ADX (0.23) signifies lower degree of the upside movement it had in recent trading sessions.

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The slope of the trend line is low; this signifies that the probability of price correcting steeply is very less.

Hence, the risk involved in HOLDING the stock is comparatively less.

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As per the valuation, the stock is overpriced. One of the reasons behind a low Discounted Value is that, for years it had debt and in the last fiscal it became debt free.

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Also, the return on equity calculated through CAPM is lower than the actual return. Though the difference between the expected and real return is just 1%.

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It is the second largest oil producer of our country after ONGC(Which is state-owned). Cairn India is growing at a faster pace. Therefore, one can see a lot of potential in the company.

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Technicals shown do not support entry at current price level.

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Recently, there has been a news regarding CEO, P Elango resigning, which further shows that the fundamentals of the company are not that favourable to put in money.

It is not so favourable to enter it currently.

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Post-Elections 10th round of New Exploration Licensing policy is going to be held, CAIRN India is going to be a front runner in the race of new licenses, one can expect the business to be in better state after that.

Keeping in mind the current market dynamics and it’s performance as compared to the peers, it’s a SELL call.

In the long run company can grow as they have many assets which they have not yet monetized.

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Pulkit Ahooja Equity Research Analyst Vriddhi Research

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