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Vedanta deal: Potential impact on earnings, valuation for Cairn India
What's changed
The Indian government has approved the Cairn-Vedanta deal with riders
such as: 1) the 16.67% royalty on oil should be treated as cost recoverable,
and 2) the ongoing arbitration on payment of cess of Rs2,575/ton should
be withdrawn. Although Cairn India board has not commented on the
terms, we note that the two big shareholders—Cairn Plc (62.2%) and
Vedanta group (18.5%)—have been trying to close the deal since Aug 2010.
The terms, if implemented, are likely to imply lower earnings, asset
valuation for Cairn India, in our view.
Implications
While this approval ends a long period of uncertainty for the Cairn India
stock, we estimate: 1) making royalty cost recoverable implies cumulative
negative cash flow impact of US$2.8 bn to Cairn India over life of the project,
(2) withdrawing arbitration would likely continue the current status of Cairn
India paying oil cess, going forward. If these conditions were to be
implemented, we estimate Cairn India’s FY12E/FY13E EPS could potentially
decline by 27% each to Rs52/Rs61 and NAV would potentially be impacted by
about -14% to Rs350/share. However, we believe the deal approval could
likely lead to further production ramp-up for Cairn India, which has been
stuck due to uncertainty on royalty payment. We estimate Rajasthan oil
volumes to reach 175 Kb/d by March 2012E and peak to 215 K b/d by
December 2012E from the current level of 125Kb/d. We believe that
management guidance on future growth strategy and deployment of cash
flows from Rajasthan would be key to stock performance going forward.
Valuation
We maintain Neutral on Cairn India and our 12-m NAV-based TP of Rs405,
without any royalty payment. Without royalty, the Cairn India stock is
currently implying a long-term oil price of US$68/bbl, in our view.
Key risks
Upside: Reserve, oil price rise; downside: production delay, regulations.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Vedanta deal: Potential impact on earnings, valuation for Cairn India
What's changed
The Indian government has approved the Cairn-Vedanta deal with riders
such as: 1) the 16.67% royalty on oil should be treated as cost recoverable,
and 2) the ongoing arbitration on payment of cess of Rs2,575/ton should
be withdrawn. Although Cairn India board has not commented on the
terms, we note that the two big shareholders—Cairn Plc (62.2%) and
Vedanta group (18.5%)—have been trying to close the deal since Aug 2010.
The terms, if implemented, are likely to imply lower earnings, asset
valuation for Cairn India, in our view.
Implications
While this approval ends a long period of uncertainty for the Cairn India
stock, we estimate: 1) making royalty cost recoverable implies cumulative
negative cash flow impact of US$2.8 bn to Cairn India over life of the project,
(2) withdrawing arbitration would likely continue the current status of Cairn
India paying oil cess, going forward. If these conditions were to be
implemented, we estimate Cairn India’s FY12E/FY13E EPS could potentially
decline by 27% each to Rs52/Rs61 and NAV would potentially be impacted by
about -14% to Rs350/share. However, we believe the deal approval could
likely lead to further production ramp-up for Cairn India, which has been
stuck due to uncertainty on royalty payment. We estimate Rajasthan oil
volumes to reach 175 Kb/d by March 2012E and peak to 215 K b/d by
December 2012E from the current level of 125Kb/d. We believe that
management guidance on future growth strategy and deployment of cash
flows from Rajasthan would be key to stock performance going forward.
Valuation
We maintain Neutral on Cairn India and our 12-m NAV-based TP of Rs405,
without any royalty payment. Without royalty, the Cairn India stock is
currently implying a long-term oil price of US$68/bbl, in our view.
Key risks
Upside: Reserve, oil price rise; downside: production delay, regulations.
INVESTMENT LIST MEMBERSHIP
Neutral
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