Merger with Cairn will be good for Vedanta: Sunidhi

Below is the verbatim transcript of Chintan Mehta's interview with Ekta Batra and Nigel D’Souza on CNBC-TV18.

Ekta: Cairn India is the top loser on the Nifty today. How are you reading the likely news of a possible merger between Cairn as well as Vedanta?

A: This was very much on the cards. Going with what Vedanta’s history is, this kind of merger was always on the cards given the kind of cash balance with Cairn was concerned. Previously also we have seen Sesa Goa getting merged because of its surplus cash balance. So, things are very much in line. Future course of action would be acquiring government stake of Hindustan Zinc and eventually even that getting being merged with Vedanta over the longer period of time.

Nigel: Will you view this as a positive for Vedanta given that now they have that access to Cairn India if in fact this goes through?

A: Rs 17,000-20,000 crore lying cash in Cairn could be deployed for Vedanta’s but the only concern is that whether this cash will be again used for repaying debt or any other kind of acquisitions; that needs to be seen. Given the company’s history of acquisitions that has always been a problem area. So, besides that, it is an overall positive for Vedanta.

Ekta: If you had certain reservations about this merger what would they be?

A: Considering the dividend payout, Cairn has always been on the lower side. As well as in the past we have seen the kind of loans and advances being given to the group companies. That has always been a concern with the cash companies of Vedanta. So given that now the whole conglomerate business comes into the picture that Vedanta will consist of iron ore, aluminum, oil, zinc – all of mix, so, that becomes a bit of concern for Cairn investors because before it was a pure oil play now it will be a conglomerate business and the multiples will be derived accordingly.

Nigel: Tata Steel opened up lower by close to 2.5-3 percent. This has been in the news with regard to that strike coming through but now we believe come June 22 there is a possible strike that is in the offing. How are you reading this news in terms of shutting down of the operations, what value do you give to their UK operations and do you believe the stock after a big 20-25 percent correction from the top just in the last three months, do you think it has factored this in or do you think there is more pain?

A: Two things to it. First thing is that what will be the potential savings if this pension scheme requirement goes through. The pension plan is running on a deficit of 2 billion pounds is what we are estimating and by this shifting from British Pension Scheme to Money Purchase Pension Scheme, they might eventually save around 1 billion pound. So, that is the kind of savings we are talking about.

The other aspect is that suppose the deal doesn’t go through and Tata Steel resorts back to the British Pension Scheme, essentially the liability would have been earlier, it would have been five to eight years down the line. So the immediate impact was not to be seen 17,18 or 19 earnings. So, that has to be taken into account.

If the second possibility where strike goes through, immediate impact would be that they have some inventory to liquidate and so it is very difficult to evaluate how much the strike goes on. However, they will eventually lose out 10 million tonne per annum. So, that is a bit of a concern because the company is running on EBITDA which is not even recovering depreciation and interest cost.

Ekta: When would you start changing your estimates based on how long the strike could go on for, we don’t know that now but when would it start becoming a concern for you in terms of your numbers?

A: What we understand is that the company will be running around 1.5-2 million kind of inventory. So, given that run rate two months inventory the company might be having at this point of time. So, anything beyond a month or month and a half kind of logjam will definitely start getting earnings downgrades from that aspect as well.