Maintain ‘buy’ on Cairn India with a target price of R179 per share (earlier R165) as we include the cash the loan given by Cairn to group company. However, we now take a 25% discount on the overall cash on the books. We continue to value Cairn on the average of two methodologies 1) reserve-based DCF valuation (R207), using a WACC of 11% based on a risk-free rate of 8% and a beta of 0.7, and 2) discounted dividends over the contract life of the Rajasthan block, plus net cash (R151).
The company’s loan to group company has been an overhang. Cairn India gave a loan of $1.25 billion to a group company in 2014 on a two year term. Investors in our view would have preferred that the company returned excess cash to the shareholders in form of dividend.
We now assume that the $1.25 billion loan to the group company will need to get repaid at the end of its term in 2016 and that the loan is unlikely to get rolled over given new requirement of approval by majority of minority shareholders. We are not changing earnings estimates or operational parameters.
However, the existing rules allow the management to upstream cash up to 10% of the annual consolidated turnover as per latest audited financial statement without seeking approval from minority shareholders. We, therefore, are now valuing cash on the books at a discount of 25% .
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