Cairn India's move to seek shareholder approval for an enhanced buyback of shares up to Rs 5,700 crore from the open markets is a pleasant surprise but our enthusiasm is tempered by the soft Rs 335 max price that could limit actual purchases.
Still, if followed through it can cut the share count by 8.9% and lift FY14-16E EPS by 1-6% and ROE by 50-80bps. With Rajasthan output also likely at 190kbpd now, above our 188kbpd FY14 exit forecast, valuations attractive at 6-7x P/E and crude-INR macro benign, we stay ‘overweight’.
Cairn India’s board approved a buyback proposal on Tuesday of up to Rs 5,725 crore to be conducted on the stock exchanges. This equals 15% of adjusted standalone September net-worth and will require shareholder approval, which Cairn hopes to secure via a postal ballot in the next month before commencing the offer in January.
While the enhanced size is a pleasant surprise, the reaction may be tempered by the Rs 335/sh max price (just 3.5% above last close), that could limit the room to maneuver unless a large shareholder like Cairn Energy (10.3%) offers its shares.
Nonetheless, we view the buyback as a tax-efficient and value-accretive use of its excess cash given just 6-7% yield as other income.
A follow-through on the entire amount would lower outstanding shares by 171m or 8.9%, lift EPS by 1-6% and ROE by 50- 80bps, and yet keep the balance sheet strong at 32% net cash to equity, in our view. Operational outlook may remain key to performance of the shares that have outperformed Sensex by 11% since April when Rajasthan output started to inch up.