As Cairn India puts royalty to vote, analysts see correction

The government’s insistence on treating royalty as cost recoverable will mean a deduction of Rs1,291.6 crore from Cairn India’s revenues and profit after tax for the current quarter, the company said on Wednesday.

For the quarter ended June, the company reported a near 10-fold jump in net profit to Rs2,727 crore (Rs280 crore) compared with the year-ago quarter. Revenue surged more than four times to Rs3,713 crore.

Cairn India will seek shareholders’ approval through a postal ballot to decide on the conditions imposed by the government for an acquisition by Anil Agarwal-controlled Vedanta Resources Plc to pass muster.

The company is jointly held by UK-based Cairn Energy Plc (52.1%) and London-listed Vedanta (28.5%).

Vedanta had expressed interest to acquire a further 30% stake in Cairn India, but has been unable to do so following government intervention. The government has been insisting that the company share the royalty burden with state-owned Oil and Natural Gas Corporation, which currently pays 100% of the royalty payable on production from the prolific Rajasthan field.

Under the conditions laid down by the government, the company must agree that the royalty payable under the production sharing contract is a contract cost eligible for recovery. Besides, it must withdraw the arbitration with respect to payment of cess.

Analysts feel a postal ballot will be a mere ‘formality’ since Cairn and Vedanta together have a majority holding in Cairn India. According to them, the stock is set to see a significant correction.

“With Cairn Energy and Vedanta together holding ~80% in Cairn, and signs of high willingness by both parties to close the deal, we now believe the most likely scenario is that the deal will be accepted in the current form, i.e., royalty is cost recoverable and cess arbitration be withdrawn,” said Niraj Mansingka, analyst with brokerage Edelweiss.

Brokerage JP Morgan said shareholders’ acceptance of the conditions could lead to an almost 23% negative impact on the net present value and hence a significant stock correction is expected. However, another brokerage, Quant, said the incorporation of the changes will hurt Cairn’s value by Rs84 per share. This offsets the Rs39/share value increase due to higher long-term crude price assumptions factored in earlier.