The 10-month old battle to gain control of Cairn India ended on Thursday after the cabinet committee on economic affairs (CCEA) approved Vedanta Resources Plc’s proposed acquisition of a majority stake in Cairn India Ltd, with riders to protect the interests of Cairn’s state-owned partner, Oil and Natural Gas Corp. Ltd (ONGC).
But it may be a short-lived victory for Vedanta Resources’ Anil Agarwal as the two conditions attached will mean an estimated hit of between 18-24 per cent on the earnings of Cairn, say brokerages. Cairn India earnings may take a hit up to 24 per cent because royalty will now be cost recoverable.
CCEA had endorsed the view of a group of ministers headed by finance minister Pranab Mukherjee that vetted the deal, that royalty on the Cairn-ONGC oil fields in Rajasthan be treated as cost recoverable and the ongoing arbitration case on cess to be withdrawn.
Still, some analysts say because the uncertainty has been removed, there could be some upside potential to the stock, especially given the handful of energy related stocks.
"I still there is great value in the stock. We maintain our target of about Rs 440-450 in the stock. Either way, whatever decision is taken, if it is taken, it removes uncertainty and gives clear visibility to the stock. So we remain very bullish on the stock,'' said Sandeep Bharadwaj, CEO and head-equity strategy at Tower Capital and Securities.
Agarwal, who has just finished one battle, may have yet another one on his hands if the directors and minority shareholders vote down the deal, or ask Cairn to persue a legal battle.
There are legal and equitable aspects. What has happened is the government is leveraging its ownership or control, which is a party to several agreements in this case to twist the arm of Cairn india. Legally the government may be weak in terms of what they are trying to seek through higher payments.
For now though the clear winner is ONGC, which with royalty sharing and the snuffing out of the cess arbitration can laugh all the way to the bank.
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