Update

SECTOR: OIL & GAS

Cairn India
BSE SENSEX S&P CNX

18,051

5,418

Rs333
Vedanta to Buy 51-60% stake in Cairn India

Neutral

Bloomberg Reuters

CAIR IN CAIL.BO

Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)

1,894.4 368/230 5/15/16 630.6 13.5

To pay Rs355/share to shareholders plus Rs50/share to Cairn Energy as noncompete fee; advise tendering shares in open offer; downgrade to Neutral Vedanta to buy 51-60% in Cairn India: Vedanta group plans to acquire 51-60% stake (US$8.5-9.6b) in Cairn India through purchase of Cairn Energy PLC's stake and through open offer. Sale price has been agreed at Rs405/sh, which includes Rs50/sh as non-compete fees. Thus, the shareholders will be paid Rs355/sh, while Cairn Energy will be paid Rs405/sh. This transaction is expected to complete by 1QCY11. We believe ONGC's (30% partner in Cairn's key Rajasthan asset) and government's stance on the acquisition will also be important for smooth completion of the transaction. Funding of acquisition by Vedanta: Vedanta proposes to fund its contribution by Bank loans of up to US$6.5b (> or equal to 2 year tenure) while Sesa proposes to fund its contribution of ~US$3b primarily from cash resources. Vedanta will directly own 31-40% of stake while Sesa Goa will own 20% stake in Cairn India. Acceptance Ratio at 87% if Petronas does not tender: Cairn Energy will sell a maximum of 51% stake and will keep a minimum of 11% stake in Cairn India. The free float of Cairn India is ~38%, implying an acceptance ratio of 52.6%. Assuming that Petronas (14.94%) does not tender in open offer, the acceptance ratio will be 87%. Await more clarity on value creation by Vedanta to Cairn's E&P operations: This transaction has given Cairn Energy Plc, an early chance of monetization. However, in terms of value creation to Cairn India from Vedanta we would await for its specific plans. We believe that apart from the asset potential indicated by the Cairn India management over its prior investor interactions', there is unlikely to be a significant change due to change in ownership from Cairn Energy to Vedanta. Further, as Vedanta management has stressed on re-investment, the chances of higher likely dividend payout from Cairn India now are very poor. Downgrade to Neutral: Our SOTP-based Target Price for Cairn was Rs314 at long term Brent price of US$75/bbl. At long-term Brent price of US$80/bbl, our SOTP value would increase to Rs330/share. We believe that the open offer price of Rs355/share is an attractive proposition for the Cairn India shareholders and should tender the shares. We downgrade the stock to Neutral.

SHAREHOLDING PATTERN % (JUN-10)

Others, 4.4 Foreign, 26.0

Cairn Energy 62.4

Domestic Inst, 7.3

STOCK PERFORMANCE (1 YEAR)

Cairn India Sensex - Rebased 380 340 300 260 220 Nov-09 May-10 Aug-09 Feb-10 Aug-10

Financial & valuation summary

*Consolidated

Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432/Milind Bafna (Milind.Bafna@MotilalOswal.com); +91 22 39825445

62.36 Source: Company/MOSL 16 August 2010 2 . FUNDING OF ACQUISITION BY VEDANTA COMPANY USB$ % STAKE IN CAIRN INDIA SOURCE OF FUNDS Vedanta* 6. 14. 2. the acceptance ratio will be 87%.5-9.5 Sesa Goa 3. the shareholders will be paid Rs355/sh. implying an acceptance ratio of 52. Thus.6%.  This transaction is expected to complete by 1QCY11 post the approval by shareholders and government authorities. 20.  As Cairn Energy will sell a maximum of 51% stake (will keep a minimum of 11% stake in Cairn India). Acceptance Ratio at 87% if Petronas does not tender  The free float of Cairn India is ~38%.0 * Through its subsidiary THL Aluminium Ltd 31-40% 20% Bank loans Cash reserves Source: Vedanta/MOSL Cairn Energy to Sell a maximum of 51%  Cairn Energy has agreed to sell a maximum of 51% of its stake in Cairn India to Vedanta Group at a maximum consideration of US$8.6b) in Cairn India through purchase of Carin Energy PLC's stake and through open offer.57 Petronas. a break fee of 1% will be payable by Cairn Energy. Assuming that Petronas (14.  The sale price has been agreed at Rs405/share.94%) does not tender in the open offer. its residual stake share will only be known post the results of the open offer by Vedanta. which includes Rs50/share as noncompete fees.48b. Alternate proposals could come in from Indian as well as global E&P companies.  Vedanta will be making an open offer at Rs355/share for upto 20% of the issued shares of Cairn India. while Cairn Energy will be paid Rs405/sh.94 Cairn PLC. CAIRN INDIA'S SHAREHOLDING PATTERN (%) Others. In case of non-approval from shareholders or alternate proposal sought by Cairn.13 LIC.Cairn India Vedanta to acquire 51-60% stake in Cairn India  Vedanta group plans to acquire 51-60% stake (US$8.

During the conference calls of Cairn Energy and Vedanta. Petronas: Petronas' stance is not critical for completion of the transaction.  For Vedanta group. If Petronas were to offer its shares in the open offer. then Cairn Energy stake sale may be less than 51%. 2. they are unlikely to object to the stake sale. this purchase is a non-core acquisition and offers diversification. Government: Petroleum Secretary clarified that PSC (Production Sharing Contract) has a provision permitting change in ownership depending on the credentials of the buyer. We would await more clarity on its specific plans to add value to Cairn India.It has 14. However.  We understand that the present code allows an acquirer to pay promoters of an acquired company a non-compete fee of up to 25% of the open offer price.94% stake in Cairn India. Pakistan and Bhutan for a period of three years in E&P business. 2) Government . Anything more than 25% has to be added to the open offer price.It has 30% stake in the Rajasthan block. 16 August 2010 3 .  These fees are being paid so that Cairn Plc will not compete in India. it has been conveyed that the current Cairn India management will continue to operate the business. we believe that their remains a remote possibility that government / ONGC might want to rework the PSC terms. we believe that apart from the asset potential indicated by the Cairn India management over its prior investor interactions'. ONGC: ONGC has clarified that unless there is a change in the present India management (Management Committee members & Operating Committee members) team of Cairn India. ONGC is paying 100% of the royalty in the Rajasthan block despite its share at 30%. However.Cairn India Vedanta to pay Rs50/sh as non-compete fee  Vedanta is paying Rs50/sh to Cairn Energy in the form of non-compete fees. As per Vedanta management. where in it might ask Cairn India to pay 70% of the royalty. Vedanta has indicated that it will aggressively look at reinvestment opportunities. Cairn India management has added value to its Rajasthan assets through reserve accretion as well as increase in the likely plateau production.  Over the last few years. Currently. As a result. there is now very poor chance of higher dividend payouts.  Further. 3. they are yet to receive official communication from concerned parties.They will give the final assent to the transaction based on production Sharing Contract (PSC) terms and 3) Petronas . Response of other stake holders also key to the transaction Other key stake holders in the transaction include 1) ONGC . We await more clarity on value creation by Vedanta to Cairn India's E&P operations  This transaction has given Cairn Energy a chance of early monetization of its stake. Sri Lanka. Thus. However. they can add value in terms of leveraging core skills and track record of value creation. we were earlier expecting that the rising free cash flow from Cairn India would be potentially distributed in the form of dividend in case of lack of E&P opportunities. 1. there is unlikely to be a significant change due to change in ownership from Cairn Energy to Vedanta.

CAIRN INDIA'S E&P PORTFOLIO Source: Vedanta Valuation and View Key assumptions for Cairn India  We model long term Brent crude price of US$75/bbl in our estimates and take a discount of 12. it is clear that majority of the stake of Cairn would be bought by Vedanta with this closure. 2012 and 1st July.5% (~US$9/bbl) for quality and customs duty on crude at 2.66 (Rs405).675/MT (including education tax and NCCD cess) for our DCF valuation.Cairn India Majority of Cairn Energy's residual stake would be sold by July 2013  Cairn and Vedanta have entered into two reciprocal put and call options for a number of shares equal to difference in "number of shares which will be actually sold to Vedanta" and "51%". Also.  We assume that Cairn will be required to pay cess (levy) of Rs927/MT v/s the current cess rate of Rs2. 16 August 2010 4 . 2013.5%. Higher cess payment than our estimate would be negative for Cairn by Rs22/share. This implies that Cairn will offload its 10% stake (maximum) at Rs405/sh in two tranches post 1st July.  The price fixed for both put and call option is fixed at US$8. Each option is exercisable for maximum of 5% of issued share capital.

722 Ravva 440 Cambay 310 KG-DWN-98/2 . CAIRN: VALUATION SUMMARY US$M RS B RS/SHARE REMARKS Rajasthan Block . Appr Area 1. our SOTP value would increase to Rs330/ share. 30% of GCoS Source: MOSL Cairn's fair value estimate is highly leveraged to crude price assumption Cairn's fair value is highly leveraged to oil prices. 0 Contin.Deep Water 280 Other Exploration Assets 600 Target Price 13.Cairn India Downgrade to Neutral Our SOTP-based Target Price for Cairn was Rs314 at long term Brent price of US$75/ bbl.531 Potential Upsides Rajasthan Block Upside from current 0 development area Addition of new area in develop.EOR 2. smaller fields 1. The chart below gives our estimate of base fair value at different long-term Brent oil prices.7tcf @ US$4/boe 0 0 49 14 28 596 0 0 26 7 15 314 Exploration continues in current dev area Most likely addition is North. We downgrade the stock to Neutral.8bboe valued at US$2/boe. CAIRN FAIR VALUE (RS PER SHARE): SENSITIVITY TO BRENT 395 360 277 296 314 330 65 70 75 80 90 100 Source: MOSL Estimates 16 August 2010 5 .056 KG-DWN-98/2 .915 Rajasthan Block .Base 7.Shallow Water 250 Net Cash/(debt) FY10 end -106 Base Value 11. Resource fr. We believe that the open offer price of Rs355/share is an attractive proposition for the Cairn India shareholders and should tender the shares.467 346 119 19 14 12 -3 506 182 63 10 7 6 -2 267 DCF Based DCF Based DCF Based DCF Based 2P gas reserves of 3. At long-term Brent price of US$80/bbl. 30% GCoS ONGC indicated in-place 14tcf reserves 1bboe resources valued at US$2/boe.

Cairn India Financials and Valuation 16 August 2010 6 .

Cairn India N O T E S 16 August 2010 7 .

MOSt or any of its affiliates or employees do not provide. and it should not be relied upon such. and non-infringement. 16 August 2010 8 . Investment Banking relationship with company covered No This information is subject to change without any prior notice. Group/Directors ownership of the stock No 3. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. at any time. but we do not represent that it is accurate or complete. Nevertheless. MOSt and/or its affiliates and/or employees may have interests/ positions. including without limitation the implied warranties of merchantability. Disclosure of Interest Statement Cairn India No 1. E-mail: reports@motilaloswal. any express or implied warranty of any kind. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. however. 3rd Floor. The recipients of this report should rely on their own investigations. legal or taxation advice to you. The report is based upon information that we consider reliable.Cairn India For more copies or other information. MOSt has incorporated a Disclosure of Interest Statement in this document. Analyst ownership of the stock 2. fitness for a particular purpose. not be treated as endorsement of the views expressed in the report. Mumbai 400 021 This report is for the personal information of the authorized recipient and does not construe to be any investment.com Motilal Oswal Securities Ltd. Nariman Point. To enhance transparency. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Broking relationship with company covered No 4. Hoechst House. This should. contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. and would be happy to provide information in response to specific client queries. regarding any matter pertaining to this report. financial or otherwise in the securities mentioned in this report. MOSt is committed to providing independent and transparent recommendations to its clients.

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