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Cairn India (CAIR)
Energy
The end game may be near. India’s cabinet may decide on the Cairn Plc-Vedanta deal
in its next meeting on April 6, 2011, as per some press reports. It is hard to take a call
on the cabinet decision regarding the vexatious royalty issue; different ministries of the
government have different opinions on the same. However, CAIR stock will find support
from high crude prices even if the deal does not fructify. CAIR stock is discounting
US$99/bbl crude oil price in perpetuity, which may cap the upside though.
Decision on deal soon either way
The Indian Cabinet may decide on the CNE-VED deal on April 6, 2011, as per some news reports.
The Cabinet Committee on Economic Affairs (CCEA) will decide on the two options submitted by
the oil ministry—(1) royalty be treated as a cost-recoverable item along with other preconditions
for approval for the deal and (2) royalty issue be decided separately later. The oil ministry, law
ministry and solicitor general of India are reportedly in favor of the former while the finance
ministry is in favor of the latter. We note that VED is unlikely to go ahead with the deal in its
current form if royalty is treated as a cost-recoverable item or CAIR has to bear royalty
proportionate to its production from the key Rajasthan block.
Life beyond the deal; high crude prices will provide short-term impetus
We note there is no upside for a minority shareholder from the open-offer as the current stock
price is higher than the open-offer price of `355. We expect current high crude oil prices to
provide some impetus to CAIR stock in the short term irrespective of the outcome of the deal.
CAIR’s valuations will look extremely ‘cheap’ based on near-term earnings arising from current
high crude oil prices. We compute CAIR’s FY2012E EPS at `72 assuming US$115/bbl of crude
price (Dated Brent) against our current estimate of `57 based on crude price forecast of US$95/bbl.
Life further beyond the deal; stock is discounting US$99/bbl crude oil price in perpetuity
Our reverse-valuation analysis (see Exhibit 1) suggests that CAIR stock price is discounting
US$99/bbl in perpetuity. We use 11% WACC (COE, for all practical purposes) and assume
recoverable reserves of 1.44 bn barrels in the Rajasthan block. We note that assumptions of longterm
crude oil prices have a material impact on CAIR’s fair valuation as can be seen in Exhibit 2.
Revised earnings to factor in surge in crude price in the month of March 2011
We have fine-tuned FY2011E EPS (`33 versus `31 previously) to factor in the surge in crude oil
prices in the month of March 2011. We have left our FY2012E and FY2013E EPS unchanged at
`57 and `58 based on crude price estimate of US$95/bbl and US$90/bbl but see large upside risks
if crude oil prices sustain at current levels; Exhibit 3 gives sensitivity of CAIR’s EPS to crude price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
The end game may be near. India’s cabinet may decide on the Cairn Plc-Vedanta deal
in its next meeting on April 6, 2011, as per some press reports. It is hard to take a call
on the cabinet decision regarding the vexatious royalty issue; different ministries of the
government have different opinions on the same. However, CAIR stock will find support
from high crude prices even if the deal does not fructify. CAIR stock is discounting
US$99/bbl crude oil price in perpetuity, which may cap the upside though.
Decision on deal soon either way
The Indian Cabinet may decide on the CNE-VED deal on April 6, 2011, as per some news reports.
The Cabinet Committee on Economic Affairs (CCEA) will decide on the two options submitted by
the oil ministry—(1) royalty be treated as a cost-recoverable item along with other preconditions
for approval for the deal and (2) royalty issue be decided separately later. The oil ministry, law
ministry and solicitor general of India are reportedly in favor of the former while the finance
ministry is in favor of the latter. We note that VED is unlikely to go ahead with the deal in its
current form if royalty is treated as a cost-recoverable item or CAIR has to bear royalty
proportionate to its production from the key Rajasthan block.
Life beyond the deal; high crude prices will provide short-term impetus
We note there is no upside for a minority shareholder from the open-offer as the current stock
price is higher than the open-offer price of `355. We expect current high crude oil prices to
provide some impetus to CAIR stock in the short term irrespective of the outcome of the deal.
CAIR’s valuations will look extremely ‘cheap’ based on near-term earnings arising from current
high crude oil prices. We compute CAIR’s FY2012E EPS at `72 assuming US$115/bbl of crude
price (Dated Brent) against our current estimate of `57 based on crude price forecast of US$95/bbl.
Life further beyond the deal; stock is discounting US$99/bbl crude oil price in perpetuity
Our reverse-valuation analysis (see Exhibit 1) suggests that CAIR stock price is discounting
US$99/bbl in perpetuity. We use 11% WACC (COE, for all practical purposes) and assume
recoverable reserves of 1.44 bn barrels in the Rajasthan block. We note that assumptions of longterm
crude oil prices have a material impact on CAIR’s fair valuation as can be seen in Exhibit 2.
Revised earnings to factor in surge in crude price in the month of March 2011
We have fine-tuned FY2011E EPS (`33 versus `31 previously) to factor in the surge in crude oil
prices in the month of March 2011. We have left our FY2012E and FY2013E EPS unchanged at
`57 and `58 based on crude price estimate of US$95/bbl and US$90/bbl but see large upside risks
if crude oil prices sustain at current levels; Exhibit 3 gives sensitivity of CAIR’s EPS to crude price.
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