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Uncertainties to continue as government defers decisions – Sets up another
committee
There was much anticipation that this deal would be cleared by CCEA, and this new GoM further delays the entire process.
Even though it was announced that the Finance Minister will head the GoM, the composition of GoM was also not finalised in
the meeting. The setting up of GoM itself may take a few days, and decision making could take at least a few weeks (if not
more), in our view.
The shareholder approval deadline of April 15 by both Vedanta and Cairn Plc shareholders is only days away, and it looks
unlikely the GoM decision would be taken by then. Both Cairn Plc and Vedanta have said that they expect government
approvals by the April 15 deadline, and are not looking to approach shareholders to extend the deadline. Adhering to this
deadline looks near impossible to us.
The delay also, in our view, puts a question mark on the planned open offer from Monday, 11 April 2011. After SEBI’s
clearance last week to start the open offer process, Sesa Goa (A Vedanta group company) today came out with a revised
schedule for an open offer. The offer was slated to open on April 11 and close on April 30. The media announcement from
Sesa Goa mentioned that acquisition remains conditional on Government of India consents.
In our view, the royalty has been the key issue of debate. Cairn has a view that it is not liable to pay a royalty, and that the
royalty is not a recoverable cost as per the PSC. However, in his comments, the Petroleum Minister mentioned that there was
consensus on the royalty being cost recoverable.
Our view has been that Cairn’s case on the royalty is strong, and that it is unlikely it will pay or agree to the cost recovery of
the royalty. In our current numbers, we do not factor any payment or sharing of royalty by Cairn. We also believe that if
government decides to make the royalty cost recoverable, this decision would be legally contested by Cairn. However, this
process could be long-drawn out and bring in added uncertainty. In our estimates, the impact of royalty cost recovery on NAV
would be ~INR50/share (13.5% of our NAV of INR370/share), and would be a clear negative.
The continued delay has been the key concern and overhang on the stock. Further delays and non-clarity on royalty, in our
view, would put near term pressure on the stock. However, we would not be concerned if this transaction were to be called
off, as it does not impact operating listed company (unless it is made to pay/share royalty), which we like for exploration upside
potential. Operating performance remains strong, oil remains firm and we would expect the stock to do some catching up once
clarity on government approvals emerges.
Valuation Methodology and Investment Risks: Valuation Methodology - We value Cairn India on an SOTP basis, combining NAV and
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under development) and Rageshwari & Saraswati (FDP
approved) using a discounted cash flow (DCF) methodology. Our NAV of MBA and R&S field is INR276/share. The Ravva and Cambay
blocks are valued at INR7/share and INR2/share, respectively. We value Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at
US$6/boe, which we regard as conservative. We value recoverable resources (140mmboe now) in other 20 fields at US$6/boe and
prospective resources of 1.76bboe (net of recoverable resources) at US$1/boe. We also assign a value of US$6/boe to exploration upside
potential (prospective recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP based NAV for Cairn is
INR369/share. Our PT for Cairn India is INR370.Risks - Delays in ramp-up of production; lower oil prices and higher discounts than our
assumptions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Uncertainties to continue as government defers decisions – Sets up another
committee
There was much anticipation that this deal would be cleared by CCEA, and this new GoM further delays the entire process.
Even though it was announced that the Finance Minister will head the GoM, the composition of GoM was also not finalised in
the meeting. The setting up of GoM itself may take a few days, and decision making could take at least a few weeks (if not
more), in our view.
The shareholder approval deadline of April 15 by both Vedanta and Cairn Plc shareholders is only days away, and it looks
unlikely the GoM decision would be taken by then. Both Cairn Plc and Vedanta have said that they expect government
approvals by the April 15 deadline, and are not looking to approach shareholders to extend the deadline. Adhering to this
deadline looks near impossible to us.
The delay also, in our view, puts a question mark on the planned open offer from Monday, 11 April 2011. After SEBI’s
clearance last week to start the open offer process, Sesa Goa (A Vedanta group company) today came out with a revised
schedule for an open offer. The offer was slated to open on April 11 and close on April 30. The media announcement from
Sesa Goa mentioned that acquisition remains conditional on Government of India consents.
In our view, the royalty has been the key issue of debate. Cairn has a view that it is not liable to pay a royalty, and that the
royalty is not a recoverable cost as per the PSC. However, in his comments, the Petroleum Minister mentioned that there was
consensus on the royalty being cost recoverable.
Our view has been that Cairn’s case on the royalty is strong, and that it is unlikely it will pay or agree to the cost recovery of
the royalty. In our current numbers, we do not factor any payment or sharing of royalty by Cairn. We also believe that if
government decides to make the royalty cost recoverable, this decision would be legally contested by Cairn. However, this
process could be long-drawn out and bring in added uncertainty. In our estimates, the impact of royalty cost recovery on NAV
would be ~INR50/share (13.5% of our NAV of INR370/share), and would be a clear negative.
The continued delay has been the key concern and overhang on the stock. Further delays and non-clarity on royalty, in our
view, would put near term pressure on the stock. However, we would not be concerned if this transaction were to be called
off, as it does not impact operating listed company (unless it is made to pay/share royalty), which we like for exploration upside
potential. Operating performance remains strong, oil remains firm and we would expect the stock to do some catching up once
clarity on government approvals emerges.
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under development) and Rageshwari & Saraswati (FDP
approved) using a discounted cash flow (DCF) methodology. Our NAV of MBA and R&S field is INR276/share. The Ravva and Cambay
blocks are valued at INR7/share and INR2/share, respectively. We value Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at
US$6/boe, which we regard as conservative. We value recoverable resources (140mmboe now) in other 20 fields at US$6/boe and
prospective resources of 1.76bboe (net of recoverable resources) at US$1/boe. We also assign a value of US$6/boe to exploration upside
potential (prospective recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP based NAV for Cairn is
INR369/share. Our PT for Cairn India is INR370.Risks - Delays in ramp-up of production; lower oil prices and higher discounts than our
assumptions.
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