Downgrade Cairn India to ‘Hold’ with target of Rs 380: Ambit

MUMBAI: Ambit Capital has downgraded Cairn India to ‘Hold’ from earlier ‘Buy’ after Vedanta Resources decision to acquire 51-60 per cent stake in the company. The brokerage has however maintained its price target of Rs 380 per share.

Cairn Energy is expected to sell 40-51% of its stake in Cairn India (it currently has 62.4%) to Vedanta Resources for a consideration of US$6.65bn-US$8.48bn, implying per share value of Rs405. This includes Rs50/share of non-compete fee paid to Cairn Energy for not engaging in E&P operations in Bhutan, India, Sri Lanka and Pakistan for a period of three years.

At the acquisition price of Rs 405/share, Vedanta has valued Cairn India at ~US$24/boe (2P+2C). Post the open offer (additional 20% at Rs 355/share) Vedanta would hold 51%-60% of Cairn India. Cairn Energy’s stake in Cairn India, on the other hand, would reduce to 21.6%-10.6% (fully diluted basis) depending upon the open offer response

“While maintaining our 12-month target price of Rs 380, we downgrade the stock from BUY to HOLD, mainly on two counts a) the stock is likely to be rangebound given deal closure by 1QCY11 b) concerns on the lack of experience of the new management in handling E&P operations is likely to impact valuation in the medium term.

We would however highlight that Vedanta management has delivered superior operational performance in assets acquired historically ( Sesa Goa, Hindustan Zinc),” the report said.