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Can CAIRN shareholders be as lucky as MARUTI?

, July 28, 2014, 2 Comments

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Quarterly Results : Devil in (Depreciation) details

Last Wednesday Cairn India announced its quarterly results after market hours. There were two main issues, change in depreciation and related party transaction (a loan of $1.25 billion extended to its parent Vedanta Resources). Due to the change in Companies Act, company has shifted its method from  Straight Line production  to unit production. Though depreciation is a non-cash item it influenced the bottom line to a great extend.

Net profit for the April-June 2014 quarter stood at Rs 1,093 crore, compared to Rs 3,127 crore in the year-ago period. Profits would have been even lower if there was not a sharp jump in other income from 125 crore to Rs 418 crore, in the corresponding quarter last year.

Transparency issues

Another more pressing issue is of advancement of loan to the parent company -Vedanta Resources. Cairn has extended a loan of USD 1.25 billion (nearly Rs 7,500 crore) to its parent Vedanta for a two-year period as a part of it’s treasury operations.

Certain section of market terming this as a lack of transparency and corporate governance issue. Hetal Dalal, COO of proxy firm Investor Advisory Services India Ltd is concerned by the levels of disclosure made by the company with respect to this transaction.

According to her, “The transaction has taken place without shareholders knowing it This is clearly a related party transaction so given the fact that related party transactions have to be put to shareholders for a vote, the question is at what point in time was this transaction undertaken and what is the difference in the timeline between undertaking this transaction and actually disclosing it.

In response to media reports Cairn India issued a clarification clearing their position. Company says :

“We would like to clarify that the Company has complied with the applicable Regulatory requirements in respect of the said transaction. This being a Related Party Transaction (RPT), prior approval of the Audit Committee was taken and the transaction is being effected on arm”s length principle. The said loan has been extended by subsidiaries of Cairn India and the coupon rate is commensurate with the market rate for such transaction.

The transaction in question is not a “material” transaction. Accordingly, no approval of shareholders / disclosure is required.”

 

How similar it is with MARUTI?

This is another high profile case involving a reputed and Blue chip company. Similar issues of corporate governance were highlighted  in the case of Maruti Suzuki for its proposal to make cars for its parent company from Gujarat Plant. Investors (including all the institutional shareholders) argued at that time that it will erode shareholders value and turn company in to a trading firm, from a manufacturing company. After facing initial resistance, company dropped the proposal and from that point the stock price of Maruti rose more than 40%.

Do we see some similarity in Cairn’s case and Maruti? On face of it, it seems to have some degree of similarity. In case of Cairn even after clarification, shareholder were left with the a critical question of, why such loan was given to parent company, instead of investing in its own business.

As of now no institutional shareholder (besides proxy firm) has publicly raised its concern  like in the case of Maruti, but those who tracks Anil Agarwal group says it is a routine affair. In the past at various instances the minority shareholders were left high and dry. (Sterlite buy back case, Utilisation of Cash in Sesa Goa in the midst of credit crisis). Transparency is always been a sticky issue for group and it seems, this time also it is no different.

In case, if more shareholders come together to protest strongly, case would have been different, but it seems unlikely now.

What do shareholder do now?

It is unfortunate for the existing shareholders as post quarterly numbers, stock price has corrected by more than 12% in just two days.

Taking note of the recent developments, Brokerage firms such as Macquaire suggests buying the stock for a target of Rs 377, Motilal Oswal has ‘Neutral’ rating on stock, ICICI Direct has ‘Hold’ and Emkay stocks has ‘Accumulate’ rating on stock. However, Asia focused CLSA has given ‘Underperform’ rating on the stock. Interestingly, all brokerages have a target price in excess of Rs. 365 on this stock.

One should focus on Operational performance, management guidance and their confidence in meeting the financial target in time. Cairn India is arguably the only dedicated crude player in Asia. It may take a while but going by its historical performance, shareholder will see a rewarding time coming ahead.

CAIRN shareholders may not get the return as fast as MARUTI’s shareholder but it could be as substantial as MARUTI over a period of time.

 






  • Sunilc

    wait is painful

  • Sunilc

    wait is painful