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 Indias 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.