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Cairn India Ltd. (CAIL.BO)
Buy Equity Research
Clarity on royalty and long term strategy key for stock performance
What's changed
According to Reuters, the Indian Cabinet Committee of Economic Affairs
(CCEA) will discuss the Cairn-Vedanta deal this week in order to make a
final decision. The oil ministry has maintained it has nothing against the
deal but is trying to protect ONGC’s interests. The article also mentioned
that the CCEA might consider de-linking the royalty issue from the deal,
although it views royalty as cost-recoverable and should be paid by both
Cairn and ONGC. Cairn India, on the other hand, has maintained that as
per the pre-NELP regulations, ONGC – the licensee of the block, is liable to
pay 20% royalty for full production in Rajasthan.
Implications
While the CCEA might approve the Cairn-Vedanta deal after de-linking the
royalty issue, it may not take a final decision on royalty now, the article stated.
We note that there is a dispute-resolution mechanism by arbitration already
built in the production-sharing contract (PSC), which might be used by any
party in case of disagreement. However, irrespective of the eventual outcome,
lack of certainty on the royalty issue could remain an overhang on the Cairn
India stock. It is also not clear whether Cairn India would be required to pay
royalty “under protest” (like cess) during the arbitration process, if there is
one. We also believe that clarity on the long term growth strategy of Cairn
India under a new parent would be important for investors as we estimate
Cairn to generate annual free cash flow of US$2.5bn-US$3.0bn from FY12E
onwards, with no known reinvestment opportunities as of now.
Valuation
We keep our Buy rating on Cairn India with 12-m NAV-based TP of Rs395,
implying upside of 14%. The stock currently implies long-term Brent of
US$76/bbl from FY13E onwards. In the scenario that Cairn must pay 20% royalty
for its share of the production, the NAV impact would be Rs62/sh, in our view.
Key risks
1) Delay in Rajasthan ramp-up; 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Ltd. (CAIL.BO)
Buy Equity Research
Clarity on royalty and long term strategy key for stock performance
What's changed
According to Reuters, the Indian Cabinet Committee of Economic Affairs
(CCEA) will discuss the Cairn-Vedanta deal this week in order to make a
final decision. The oil ministry has maintained it has nothing against the
deal but is trying to protect ONGC’s interests. The article also mentioned
that the CCEA might consider de-linking the royalty issue from the deal,
although it views royalty as cost-recoverable and should be paid by both
Cairn and ONGC. Cairn India, on the other hand, has maintained that as
per the pre-NELP regulations, ONGC – the licensee of the block, is liable to
pay 20% royalty for full production in Rajasthan.
Implications
While the CCEA might approve the Cairn-Vedanta deal after de-linking the
royalty issue, it may not take a final decision on royalty now, the article stated.
We note that there is a dispute-resolution mechanism by arbitration already
built in the production-sharing contract (PSC), which might be used by any
party in case of disagreement. However, irrespective of the eventual outcome,
lack of certainty on the royalty issue could remain an overhang on the Cairn
India stock. It is also not clear whether Cairn India would be required to pay
royalty “under protest” (like cess) during the arbitration process, if there is
one. We also believe that clarity on the long term growth strategy of Cairn
India under a new parent would be important for investors as we estimate
Cairn to generate annual free cash flow of US$2.5bn-US$3.0bn from FY12E
onwards, with no known reinvestment opportunities as of now.
Valuation
We keep our Buy rating on Cairn India with 12-m NAV-based TP of Rs395,
implying upside of 14%. The stock currently implies long-term Brent of
US$76/bbl from FY13E onwards. In the scenario that Cairn must pay 20% royalty
for its share of the production, the NAV impact would be Rs62/sh, in our view.
Key risks
1) Delay in Rajasthan ramp-up; 2) any adverse regulatory developments.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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