 "Cairn India buyback: Should you tender shares?")
Cairn India has announced Rs 5,725 crore share buyback plan at a price not exceeding Rs 335 a share. Reacting to the development, the stock opened weak in trade on Wednesday and lost over a per cent to Rs 320 levels on the Bombay Stock Exchange (BSE) in intra-day deals. Expected to be initiated in January 2014, the buyback proposal is subject to shareholder and other regulatory approvals.
The company reported a 46% jump in its September quarter net profit at Rs 3,385.08 crore and remains the top pick for analysts in the oil & gas space.
Says Somshankar Sinha, an analyst tracking the sector with Barclays Bank in Hong Kong: “While the enhanced size is a pleasant surprise, the reaction may be tempered by the Rs 335/share max price (just 3.5% above last close), that could limit the room to manoeuvre unless a large shareholder like Cairn Energy (10.3%) offers its shares. A follow-through on the entire amount would lower outstanding shares by 171 million or 8.9%, lift EPS by 1 – 6% and ROE by 50 – 80 basis points, and yet keep the balance sheet strong at 32% net cash to equity, in our view.”
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Sinha also adds, “Nonetheless, we view the buyback as a tax-efficient and value-accretive use of its excess cash. Operational outlook may remain a key to performance of the shares that have outperformed Sensex by 11% since April when Rajasthan output started to inch up. Higher output should bode well for the shares given inexpensive 6 – 7x P/E and tailwinds from resilient crude and weak rupee. Maintain overweight stance with a target price of Rs 390”
Says Harshad Borawake, an analyst with Motilal Oswal: “We believe the buyback is a positive move for the existing shareholders and successful buyback will not only enhance the per share equity value but will also allay the cash utilisation concerns to an extent. The maximum buyback price of Rs 335/share is at a 15% discount to our target price of Rs 395/share.”
Sound footing
The company is on a sound fundamental footing, government policies are now getting gradually aligned and the Integrated Development Plan (IDP) will give Cairn flexibility to develop new discoveries and manage Rajasthan field like a portfolio, analysts say
Going ahead, the number of exploration rigs is set to increase to 5 by the end of FY14 as Cairn looks to explore aggressively in Rajasthan. 4 out of 6 wells drilled so far have seen presence of hydrocarbons underlining to strong potential of Rajasthan block. Q2FY14 production has ramped up to 176kbpd, and is on track to reach 200kbpd by FY14-end. IDP will help discoveries like Barmer Hill/NI-NE to be developed in the short-term, analysts say.
“Policy actions to facilitate exploration and fast-track development will benefit Cairn in the medium-term. Also, we expect positive news flow on reserve upgrades and production-ramp-up. Our SOTP (sum-of-the-parts) for Cairn stands at Rs 395/share. Maintain Buy,” Borawake of Motilal Oswal suggested in a recent report.