Cairn’s premium may not be big enough to tempt most investors

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SummaryGiven most analysts believe there’s a lot more steam left in the Cairn India stock since the price of crude oil is expected to remain firm

Given most analysts believe there’s a lot more steam left in the Cairn India stock since the price of crude oil is expected to remain firm and the currency weak, the oil producer’s offer to buy back shares might meet with a mixed response. If at all, Cairn Energy, which holds just over 10% stake in the company, may want to sell some of its shares.

Cairn on Tuesday said it would be willing to buy back 8.9% of its equity or 17.09 crore shares at R335 apiece. That’s 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 producer’s 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

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