Buy Cairn India; target of Rs 246: Edelweiss

Edelweiss' report on Cairn India

Cairn India (Cairn; INR188) has announced an all-share merger with parent Vedanta (VEDL; INR181) in a 1:1 swap ratio. Cairn’s minority shareholders will also receive one 7.5% preference share in VEDL with a face value of INR10, which could be redeemed after 18 months. From Cairn’s perspective, we fail to understand the benefits of any synergies that could result from the merger, while VEDL shall lower its debt by accessing Cairn’s INR160bn cash pile. In fact, an imminent conglomerate discount shall further impact Cairn’s value given the merger. We believe Cairn’s minority shareholders shall weigh these issues very carefully. Besides, the High Court decision may also be a significant hurdle in the ongoing INR205bn tax dispute. The Cairn stock has corrected 48% YoY and is currently discounting Brent price of USD45/bbl. Maintain ‘BUY’.

"Cairn’s stock price has declined 48% YoY tracking 40% YoY dip in oil prices and underperforming parent VEDL stock price by 12%. Intrinsically, we have valued Cairn at INR246 with cash comprising more than half of the value. The CMP discounts long-term crude oil price of USD45/bbl and a healthy dividend yield of 5%. The stock is currently trading at 11x FY16E PER. We maintain ‘BUY/SO’, with a target price of INR246", says Edelweiss research report.

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