Rising crude oil prices are normally not good news for India. For one, it means higher inflation. The current account deficit also rises. And the oil subsidy bill keeps mounting. But one Indian company likely to benefit is Cairn India Ltd.
On Monday, Vedanta Resources Plc announced that the proposed acquisition of a 51-60% interest in Cairn India Ltd from Cairn Energy Plcwas approved by its shareholders. While that may be good news, the acquisition is conditional on regulatory approvals, and there’s still plenty of confusion on that front. It’s no wonder then that Cairn India’s stock has underperformed the BSE 100 index on the Bombay Stock Exchange since 16 August, when Vedanta announced its intention to acquire the company. Investors were disappointed with the discrepancy in the pricing offered to Cairn Energy Plc and minority shareholders.
Vedanta had agreed to pay Cairn Energy Rs405 per share, which includes an additional Rs50 per share as a non-compete fee, but the open offer price for minority shareholders is expected to come at Rs355 per share, excluding the non-compete fee.
According to analysts, the Vedanta-Cairn deal is one of the major overhangs on the stock. Otherwise, the stock may have appreciated more, as crude oil prices are moving up.
Having said that, many analysts are recommending selling the scrip after Cairn India announced its September quarter results and the stock was trading at about Rs320 per share.
According to a post results note from Religare Capital Markets Ltd, the stock at that time was factoring in long term crude oil price of $81 (Rs3,645) per barrel against Religare’s long term crude price outlook of $70 per barrel. Currently, Cairn India’s stock is trading higher at Rs336 per share. That can be attributed to higher crude oil prices.
According to an analyst, the open offer price of Rs355 per share discounts long-term crude oil price of about $90 per barrel. Given that, even as the absence of non-compete fee to minority shareholders appears unfair, they would still gain if the open offer comes at Rs355 per share. That’s one way to look at it.
The other side of the coin is if investors expect crude prices to move towards $100 per barrel and stay there, it could perhaps offer more upside than the open offer price that Vedanta is willing to pay.
Given the fact that Cairn India is the only crude oil player in the country (ONGC has subsidy issues), and with the outlook for crude looking good, it makes sense for investors to stick with the stock for the longer term.