Cairn India: Low on cash; Rating 'Reduce'

Jul 28 2014, 11:11 IST
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SummaryRelated-party loan of $1.25 billion to Sesa Sterlite a significant negative

We see the related-party loan facility of $1.25 bn extended by Cairn India to a subsidiary of Sesa Sterlite as a significant negative, as it warrants concern on effective utilisation of cash/equivalents and future cash flows of the company. We retain our Reduce rating on Cairn India stock with a revised DCF(discounted cash flow)-based target price of R330 (R355 earlier) factoring in risks to cash utilisation through higher cost of equity.

Loan extended for two years: Cairn India has extended $1.25 bn of loan facility at an interest rate of 3% above Libor to a subsidiary of Sesa Sterlite for two years, backed by a corporate guarantee from Vedanta Resources Plc. Cairn has disbursed $800m till date and plans to provide the remaining $450m in the near term. We note that Cairn has taken approvals for extending this facility from the Board and Audit Committee, in which the related parties were not allowed to vote. However, the related-party loan facility is worrying in the light of the large debt levels of Sesa Sterlite. The management indicated that the yield on the loan is better than other investment instruments. It ruled out the option of returning surplus cash to shareholders as dividends, as the company may require the given amount for capex on development of new discoveries from FY17 onwards, by which time the loan will be repaid to the company.

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In-line Ebitda and net income: Cairn India reported Q1FY15 Ebitda and net income (excluding exception item) in line with our estimates at R33.1 bn (-14% q-o-q) and R27.2 bn (-10.4% q-o-q) respectively, as lower-than expected revenues and higher DD&A (depletion, depreciation and amortisation) expenses were offset by lower operating costs and higher other income. Reported net income of R10.9 bn included an exceptional item of R16.3 bn pertaining to impact from retrospective change in accounting of depreciation. Gross production from the Rajasthan block declined 4% quarter-on-quarter to 183.2 kboe/d (thousand barrel of oil equivalent per day.) Crude price realisation for the Rajasthan block rose 2.7% q-o-q to $97.5/bbl, at 11% discount to Dated Brent.

Fine-tune estimates: We revise our FY15-17e EPS (earnings per share) to R55.3 (+1.3%), R48.2 (-3.1%) and R36.4 (-7.4%) to reflect (i) Q1FY15 results, (ii) higher DD&A charges and (iii) other minor changes.

Q1 results

n Sequential decline in production from Rajasthan block. Gross production (oil and gas) from Rajasthan block declined to

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