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Cairn India Limited Neutral
CAIL.BO, CAIR IN
Corporate developments overshadow operational delivery
The Cairn-Vedanta saga seems to be entering its final act. Shareholders’
ballot on government pre-conditions for approval of the deal is unlikely to
protect minority interests, in our view. We believe the stock price does not
reflect the likely negative outcome of the royalty cost recovery issue and
the adverse regulatory environment.
Postal ballot of shareholders to decide on Government preconditions
for Cairn-Vedanta: Government pre-conditions on making
royalty cost recoverable and withdrawal of the cess arbitration being
pursued by Cairn India is to be put to shareholders for a decision through
postal ballot. All shareholders, including Cairn Plc (52.1% stake) and
Vedanta (28.5% stake), can vote and a simple majority is needed for the
conditions to be accepted. Given current shareholding, it is likely the
conditions will be accepted.
Royalty cost recovery has a 21-23% impact on NPV: Acceptance of
the royalty pre-condition is significantly negative and Cairn Plc –
Vedanta have adjusted down their deal value to reflect this. The current
stock price reflects LT crude levels of US$110/bbl based on royalty
being made cost recoverable and do not reflect the likely negative
outcome of the royalty cost recovery issue – we believe a significant
correction in stock price is warranted.
Operational performance remains strong, but regulatory
environment adverse: Cairn India continues to deliver strong
operational performance with Rajasthan projects on track. However,
government approvals on ramp-up of production in Mangala and start-up
of Bhagyam are awaited and possibly, unfortunately hinge on acceptance
of the government’s viewpoint on royalty recovery, cess.
Our PT of Rs385 (20% premium to NPV as current crude prices are
higher than our long-term assumptions) does not factor in the cost
recoverability of royalty.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India Limited Neutral
CAIL.BO, CAIR IN
Corporate developments overshadow operational delivery
The Cairn-Vedanta saga seems to be entering its final act. Shareholders’
ballot on government pre-conditions for approval of the deal is unlikely to
protect minority interests, in our view. We believe the stock price does not
reflect the likely negative outcome of the royalty cost recovery issue and
the adverse regulatory environment.
Postal ballot of shareholders to decide on Government preconditions
for Cairn-Vedanta: Government pre-conditions on making
royalty cost recoverable and withdrawal of the cess arbitration being
pursued by Cairn India is to be put to shareholders for a decision through
postal ballot. All shareholders, including Cairn Plc (52.1% stake) and
Vedanta (28.5% stake), can vote and a simple majority is needed for the
conditions to be accepted. Given current shareholding, it is likely the
conditions will be accepted.
Royalty cost recovery has a 21-23% impact on NPV: Acceptance of
the royalty pre-condition is significantly negative and Cairn Plc –
Vedanta have adjusted down their deal value to reflect this. The current
stock price reflects LT crude levels of US$110/bbl based on royalty
being made cost recoverable and do not reflect the likely negative
outcome of the royalty cost recovery issue – we believe a significant
correction in stock price is warranted.
Operational performance remains strong, but regulatory
environment adverse: Cairn India continues to deliver strong
operational performance with Rajasthan projects on track. However,
government approvals on ramp-up of production in Mangala and start-up
of Bhagyam are awaited and possibly, unfortunately hinge on acceptance
of the government’s viewpoint on royalty recovery, cess.
Our PT of Rs385 (20% premium to NPV as current crude prices are
higher than our long-term assumptions) does not factor in the cost
recoverability of royalty.
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