Higher crude oil prices key to sustainable gains for Cairn

Shareholder nod which is required for loan rollover to Vedanta may be a trigger, analysts caution

In June 2014, Cairn India was trading near its all-time high of Rs 385. The scrip started declining after news in July that it plans to give $1.25 billion in a loan to Vedanta. Though the company clarified “the loan, after requisite approvals, has been extended for two years at a floating rate of three per cent plus LIBOR, significantly higher than comparable rates being received on fixed deposits of same tenure”, the Street was concerned on utilisation of cash with the company. Crude oil prices, thereafter, started falling, which in turn pull the stock down. Meantime, the promoters also proposed merger of Cairn India into Vedanta, which again did not go down well with investors.

While the stock has gained 36 per cent from its lows of Rs 106.60 on January 19, 2016, to Rs 145.40 following the rebound in oil prices, analysts are divided over further gains.

Read more from our special coverage on "CAIRN INDIA"

• Cairn India dips on huge Q4 loss
• Cairn India cuts capex by a third to $100 mn for FY17
• Cairn India takes big hit in Q4
• Cairn India, Vedanta merger only after Rs 10,247 crore tax liability settled: Govt
• Cairn India gains on talk of indemnity from former promoter for tax demand

One trigger is the two-year loan given in 2014, which now comes up for renewal next month. While the Street is watching developments on that front, CLSA says the stock is trading below cash levels (on its books) and is factoring an easy roll-over of loans.

However, given an ongoing court case against the loan filed by minority shareholders alleging non-adherence to the Companies Act, and hence to avoid any legal dispute, CLSA suggests Cairn India seek a clarification from the market regulator Securities and Exchange Board of India (Sebi) on the legal process.

Since the loan comes under section 49 under the Sebi’s listing agreement, which came into force from October 2014 (after the loan grant) and a $1.25 billion loan easily crosses threshold set by the clauses for a shareholder vote, they feel there can be a situation where shareholders vote is required.

If so, since the loan amount is almost 30 per cent of Cairn’s market capitalisation, the research house feels the requirement of shareholders’ vote for the rollover of this loan is a potential event that could drive a 20-30 per cent upside in the stock price.

However, the rules are new and open to interpretation. Further, the loan was extended through a foreign subsidiary and under what clause it will attract “related party” transactions norms is also open to debate. All this adds to uncertainty as concerns of Street on other factors too will weigh on the stock.

Others like Nitin Tiwari at Antique Stock Broking are still not fully confident such an event can lead to significant upsides. Siddharth Oberoi, founder of Prudent Equity says the event may not provide much trigger to the stock, as the end product (crude oil prices) remains under pressure. In fact, most analysts have a cautious view on the stock.

They don’t see substantial upside in crude oil prices and the muted production/reserve accretion outlook for Cairn is another factor worrying the Street. Analysts at Elara say considering the current crude oil price environment, the company would delay implementing EOR (enhanced oil recovery process) in Aiswariya and Bhagyam fields, which can result in decline in production. In addition, Cairn — Vedanta merger is a major over-hang on the stock according to Elara’s analysts.

Tiwari has a ‘Hold’ on the stock, and also highlights concerns over utilisation of cash in books ($2.9 billion), irrespective of the said merger.