Cairn: Open market sale makes more sense

Unless investors want to hold Cairn India as a pure oil play, selling in the open market will be more tax-efficient than the open offer.

Individual shareholders of Cairn India may be better off selling their shares in the secondary market rather than participating in the open offer on Monday.

On Wednesday, the Union Cabinet referred Vedanta’s $9.6-billion deal to acquire Cairn India to a group of ministers (GoM). On the same day, Vedanta-controlled Sesa Goa advertised the open offer for 20 per cent shares in Cairn India. The offer closes on April 30.

Most market experts are of the view that it makes sense to sell shares in the open market. V K Sharma, business head, private broking and wealth management of HDFC Securities, says unless an investor wishes to hold on to the shares because of a pure oil play, they could exit the company by selling in the open market.

Selling directly in the market makes sense for a couple of reasons. “For one, there is no restriction on the sale quantity. Also, there are tax benefits,” added Sharma.

That is, if the investor has held the stock for over a year, there will be zero capital gains tax on booking profits. If they have held it for less than a year, selling through the stock exchanges will attract a short-term capital gains tax of 15 per cent.

On the other hand, if they use the open offer route, the income will be added to the taxpayer’s ‘other income’ and taxed, according to the tax slab. For investors in the highest tax bracket of 30 per cent, the tax liability will double. So, an investor needs to consider the net amount.

The lack of a guarantee of 100 per cent acceptance is another hitch. In case of partial acceptance, prices may fall post offer and you may have to sell the residual stocks at a lower rate. So, unless the offer price is revised higher, it makes sense to sell in the market, according to a report by HDFC Securities.

Recent reports suggest Petronas is looking to exit its position in Cairn and is likely to appoint merchant bankers for the sale of shares. “If Petronas, which holds 14.92 per cent stake in Cairn India, decides to subscribe to the open offer, the acceptance ratio for shares tendered by minority shareholders will be 54.65 per cent,” said a research report by Religare Securities.

In other words, the number of shares that will be accepted by Sesa Goa will fall if Petronas uses the open offer route to exit. However, there are some others who feel investors should participate in the open offer because it provides them a good opportunity amid the uncertainty. “Retail investors can exit for now and always re-enter the stock when there is more certainty,” said Rajeev Thakkar, CEO, Parag Parikh Financial Services.

At present, the main question is should Vedanta go ahead with the deal even if ONGC’s royalty payment for Cairn’s share becomes cost-recoverable? According to a report by Religare Securities, ONGC’s royalty payment will have a big financial implication on the valuation (Rs 33/share).

However, from a long-term investor’s perspective, Cairn will become unattractive if it is asked to pay the royalty for its share of oil. On the plus side, crude oil (NYMEX) was quoting at a price of $75 a barrel when the offer was initially given. Thursday, it quotes at $108 -- 44 per cent higher. So, investors who want to own Cairn’s shares can hold on to them for long-term returns.

In addition, Cairn India is expected to post earnings-per-share of Rs 60 in FY12, with the current stock price of Rs 344 trading at 5.7 times the FY12 estimated earnings. “From a pure oil play and value perspective, this could be a good buy,” adds Sharma.