Cairn may underperform on burden of windfall tax

CNBC-TV18’s Managing Editor, Udayan Mukherjee - There is more than just a sense of fairness in clawing for it (news that Private Oil Cos may have to pay windfall tax) because the Samajwadi Party (SP), if it does actually after getting in into this government. I don’t know at what kind of ministry level they will get in. My sense is that they will do it for more reasons than one but it may actually come through this time around.

Of course it is very unfair but if it were to come through I think stocks like Cairn India will almost significantly derated because you will remember that when crude was going up continuously, the one upstream stock in the world which never performed was ONGC. Every other stock flew and got rerrated upwards in Russia, in China and Brazil but ONGC never moved because of this specific problem of sharing subsidies. Cairn India versus ONGC is like a mirror image ONGC would go down and Cairn India would just keep going up but now that whole equation might change.
 
It is no great insight on my part to say that the Samajwadi Party is closer to one of the Ambani Brothers and not very close to the other brother and that is a truth that everybody is very well aware of. To that extent there might well be targeting of Reliance Industries which the market should now begin to fear. I don’t know whether it will be made to hold because Reliance is not an insignificant company or not a company without any clout either. But it will come down to that where there will be furious lobbying and counter lobbying against and pro Reliance now to make things swing either way.
 
So I suspect there might be some apprehension for Reliance shareholders now in the light of the new formation, which is coming in. You will probably see during the latter half of the week if indeed this formation comes through. Won’t be surprised to see stocks like RNRL or Reliance Capital start to move up because the market will think that maybe issues pertaining to the regulatory world would be settled in favour of one brother compared to the other now because of the kind of equation or the formation which is there at the centre.
 
So it’s an interesting time to watch for the Reliance Group stocks both sides right now in the light of the new political realities but I think Cairn India might actually get it’s neck chopped because of this new rule if it comes through. It could be very unfair if it happened but unfair things happen when they are politically experienced. 

On Cairn India - I think the sentiment for oil sector will be hit more than anything. Last couple of years enough maths has been done on how much ONGC actually benefits from crude going up. Even if you take out the worst case discount scenario but the stock never performed. So the hangover is that Cairn India is a private company, which is now being made to share losses with public sector companies because of the oil situation.

I think the caveat is that this is not a done deal yet; we only had talks. The stock might react this morning because of sentiment reasons but that is not to say that it is done in black and white. But if it happens then I think Cairn becomes an underperformer. It doesn’t matter whether the numbers still favour Cairn, which delivering good numbers going forward.

People will feel that once the door is opened a little bit, where do you stop next year? The next year subsidy-bearing burden could go up many folds for Cairn, even if it comes in with a small start today. If it happens it’s negative there is no other way to look at it and I think the stock will reflect that punishment.