‘Add’ rating on Cairn India, target Rs 370

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SummaryWe evaluate a few provisions of Sebi regulations and the Companies Act, 2013, which may assuage ‘risks’ usually associated

Kotak Institutional Equities

We evaluate a few provisions of Sebi regulations and the Companies Act, 2013, which may assuage ‘risks’ usually associated with large cash balances of Cairn India. A transparent roadmap for ramp-up in oil production from the Rajasthan block over the next few years, if disclosed at the upcoming conference call, will allay concerns about production.

Potential exploration successes will offer comfort on recoverable reserves. We retain ‘add’ on Cairn with a target price of R370.

Our discussions with investors suggest fears about an eventual merger of Cairn India with the parent company, on terms that could be potentially detrimental to the interests of minority shareholders of Cairn India. While we do not rule out the possibility of a merger, we seek comfort from a recent modification of Sebi regulations, which necessitates approval from a majority of minority shareholders for a related-party merger of listed entities.

Investors are wary of potential related-party transactions given the large cash balances of Cairn India, which can be used to service debt repayment of the parent company/promoter group.

We highlight that Section 188 of the Companies Act, 2013, disallows a related party to vote on a transaction that exceeds the paid-up share capital of the concerned entity. This implies that a potential transaction (in excess of paidup share capital) between Cairn India and promoter group companies will require approval based on a special resolution from members of the board, who are not a related party to the promoter group, once the relevant section is notified by the government and made effective for Indian companies.

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