Cairn on Tuesday said it would be willing to buy back 8.9% of its equity or 17.09 crore shares at R335 apiece. Thats a 4% premium to the average of the weekly high and low closing prices in the last two weeks; the stock closed down 2.09% on Tuesday on the BSE at R324. Should Cairn buy out all the shares as proposed through the open market, the outgo would be R5,725 crore.
While the Street has concerns on how soon production can be ramped up the company has maintained its FY14 exit-rate production guidance of over 200 kb/d for Rajasthan block the fair value for the stock is estimated at close to R370 per share, which leaves a fairly attractive 14% upside from current levels. Production ramp-up will be crucial for any further re-rating of stock, pending which favourable crude price and exchange rate will provide downside support, Kotak Institutional Equities wrote in a recent report.
Meanwhile, the regulatory environment has turned positive with a government announcement on the Integrated Development Plan the idea being to speed up production at booth existing and new discoveries. The Cairn management believes that the time to production can be brought down by about 50%. At the end of September 30, the oil producers net cash balances were $3.2 billion.
The buyback comes on the backdrop of strong cash flows generated by the company through its operational excellence and the world class asset base. The company is currently producing over 213,000 boepd and is on track to meet year-end target of over 225,000 barrels of oil equivalent per day from all producing assets, Cairn India said in a statement.
The move by promoter Anil Agarwal is seen by analysts as betting on India's energy demand at a time when his Vedanta Group's other business in mining and metals are stuck due to environmental and other regulatory issues.
The company continues to work on its $3 billion capex programme over the next three years till FY16 and is well-placed to develop its current asset base and monetise the existing exploration opportunities with the objective of strengthening its E&P portfolio, it said.
According to the new norms on buyback unveiled by the Securities and Exchange Board of India, companies have to utilise at least 50% of the funds earmarked for a buyback from the earlier 25%. Sebi has also reduced the maximum buyback period to six months from the earlier one year and asked companies to create an escrow account towards security for performance equivalent to at least 25% of the amount earmarked.
Cairn's buyback comes at a time when multinational firms like Hindustan Unilever and GlaxoSmithkline Consumer have done the same by consolidating their stakes in Indian subsidiaries. Analysts maintain that going forward, more multinational companies may go for buybacks to consolidate stakess in their Indian subsidiaries.