Cairn India Might Buy Cairn Energy

According to media reports, Cairn Energy, which was once a parent company of Cairn India, may become a takeover target of its own child. Media reports suggesting this have quoted a recent CLSA report which has stated that Cairn India must buy Cairn Energy to increase its portfolio of oil blocks. Cairn India spokesperson has said that these are the speculative reports and do not hold any material value.

Cairn India currently has a high reliance on the Rajasthan oilfield and acquisition of Cairn Energy will change the game for the company.

In a separate report, Business Standard has said that bankers have advised the Vedanta group, a majority stakeholder in Cairn India, to buy London listed Cairn Energy. Cairn India is currently sitting on a huge cash of USD 2.7 billion and it is looking to deploy it. The company is also expecting to generate USD 1 billion of free cash flow until 2020 and hence has no funds constraints. It has also started drilling new wells and has started exploration activity in its oilfields in Cambay valley and the Krishna Godavari Basin.

The new wells that it has started drilling in Rajasthan will increase its oil portfolio and hence market is expecting rise in its overall business in the future. Investors, however, are worried on its reliance on the Rajasthan oilfields and hence the stock has not got its due valuation as per the CLSA report. The report has said that the acquisition of Cairn Energy could be a panacea for all strategic ills of Cairn India and that it should consider the acquisition of Cairn Energy as a one-shot solution to several worries. This acquisition would give Cairn India an access to 50 prospective oil and gas exploration blocks located in Greenland, Africa, Asia and Europe.

Cairn Energy holds 10.27% stake in Cairn India. The company has a market cap of Rs 56,885 as on March 12, 2013 and values Cairn Energy's stake at Rs 5844 crore. Cairn Energy also has a cash balance of GBP 932 million as per its half yearly statement. The market cap of Cairn Energy on the London stock exchange is GBP 1760 million (Rs 14231 crore). Considering these numbers, we believe that the acquisition of Cairn India may not require huge funds. Also, this will give comfort to its investors as the 10.27% stake of the company will also be bought by its promoters.

We have carried Cairn India as a Choice Scrip in our magazine DSIJ, Volume 28, Issue No. 6. On the whole, the company looks in a good shape. We see no adverse change in the scenario if Cairn Energy is bought by Cairn India and hence reiterate our 'buy' call on the company.