New Delhi: Billionaire Anil Agarwal’s Cairn India Ltd
will spend about $1 billion to buy back shares giving him greater
control over the company as environment rules derail his mining
business, two people familiar with the plan said.
The oil producer will offer to buy back shares, including Cairn Energy Plc’s
10.3% stake, and extinguish them, said one of the people, who asked not
to be identified before an announcement. The proposal may help Sesa Sterlite Ltd and Agarwal’s other companies’ boost their ownership in Cairn India to more than 65% from about 59%, the person said.
“Certainly Cairn Energy’s 10% stake in the company will
be a natural source of shares,” Alan Greene, a Singapore-based analyst
at Moody’s
Investors Service, said in a telephone interview. “Cairn Energy’s
decision to sell will depend on what the offer price is and its own
needs.”
Cairn India, which runs the nation’s biggest onshore oil
and gas field and has about $3 billion of cash, is critical to Agarwal
at a time when his metals earnings at Sesa Sterlite are languishing due
to restrictions on iron ore and bauxite mining and a ban on exports of
the steel-making ingredient from Goa. Faced with the setbacks, Agarwal
is banking on India’s energy demand, forecast to increase 14% in the
five years to 2015.
Decision on Tuesday
The board of Cairn India, based in Gurgaon, will decide on the repurchase on Tuesday, according to an exchange filing.
Cairn India, which has 1.9 billion shares outstanding, gained 3.1% to Rs.327.05
at the close in Mumbai on Friday, the most since 4 September. The stock
has risen 2.5% this year, lagging behind the 4.1% increase in BSE’s
benchmark Sensex.
“We expect to be able to share the details of the
proposal post the board meeting,” Cairn India said in an emailed
statement. Cairn Energy spokeswoman Linda Bain wasn’t immediately able to comment.
Agarwal bought into Cairn India two years ago. In August, he combined India’s biggest copper producer Sterlite Industries (India) Ltd with iron ore miner Sesa Goa Ltd in August and transferred ownership of Cairn India to the merged entity.
‘Bigger dividend’
“Cairn India by buying the shares is reinforcing Sesa
Sterlite’s position in the company,” Greene said. “Buyback is quite an
effective way to utilize cash and this way they are also utilizing idle
cash. Sesa Sterlite would have a bigger proportion of the company and
therefore a bigger proportion of the dividend.”
Cairn India plans to spend $3 billion in three years to
raise output, according to an 22 October statement. The company, whose
output from its biggest field remained at 175,000 barrels a day for at
least five quarters, plans to increase production to 300,000 barrels
day.
“The buyback won’t dent the capital expenditure plan as the company will generate about Rs.9,000 crore of free cash flow in the year ending 31 March and Rs.7,500 crore the following fiscal year,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services Ltd. Cairn India’s profit rose 46% to Rs.3,390 crore in the three months ended 30 September, the fastest pace in three quarters.
Lower revenue
Revenue from erstwhile Sesa Goa fell after shipments
plunged to 3.1 million metric tons in the year ended 31 March, the least
since Agarwal bought the company in 2007. In six months ended 30
September, Sesa Sterlite earned Rs.1,080 crore in dividend, mainly from Cairn India, helping the company report a net income of Rs.2,820 crore.
India’s top court banned ore mining in the states of
Karnataka and Goa in August 2011 and October 2012 respectively as it
probed violations of environmental norms. The court allowed mining to
restart in Karnataka in September last year.
Agarwal’s group, which is aiming to emerge as the
nation’s biggest producer of aluminium used in beverage cans and
aircraft parts, spent $7.8 billion to build a smelter and a refinery in
Odisha. The company is still waiting to light its 1.25 million tonne
smelter for want of bauxite, which it is unable to secure due to local
opposition.
Inhabitants of the remote Niyamgiri hills, the site of
the mine, opposed the expansion plan because they believed their god
lived in the hills, prompting the government to reject Agarwal’s request
for a bauxite mining permit.
“Stand-alone Sesa is quite weak given its iron ore
operations are yet not up and running and its new aluminium smelter is
still waiting for secured raw material supplies,” Greene said.
Agarwal had also been trying to buy the government’s stake in Hindustan Zinc Ltd,
in which Sesa owns 65%. This has been delayed because of legal hurdles,
limiting his access to the company’s $3.8 billion of cash.
“Cairn India is a cash cow and means a lot for Vedanta at
this juncture,” said Joshi. “It’s imperative for Agarwal to take full
control of Cairn India.” Bloomberg
MUNTAZIR ALAM
PGDM 1ST SEM
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