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Cairn India: Analysts becoming more bullish on the stock

The stock discounts most negatives and the current price offers an attractive entry point for long-term investors.

, ET Bureau|
Last Updated: Jul 16, 2012, 08.35 AM IST
A drastic correction in Cairn India’s stock price, which fell by 20% in the past five months, can be attributed to certain international and regulatory issues.

Crude prices: The major reason for Cairn India’s correction is the fall in the international crude oil prices triggered by dollar appreciation. Though Brent crude crashed below $90 a barrel, it recovered fast to around $100.

The ongoing economic crisis may keep the international crude oil prices under pressure in the short term, but they are expected to recover in the medium term if the crisis is resolved or if the central bankers come out with more quantitative easing.

The spike in oil and gas consumption in winter for heating requirements will lend support to crude prices.

Though the dollar’s strength hurts crude oil prices, its impact on Cairn is limited since its realisations are denominated in dollar terms.

Cairn India: Analysts becoming more bullish on the stock
The Indian rupee has depreciated by 10% in the past five months, compared with a 20% fall in Brent crude prices in the same time.

The gap between Cairn crude and Brent crude has narrowed from 10-15% earlier to 8-10% now due to the embargo on Iran, and will remain at reduced levels till the embargo continues.

Regulatory issues: Though Cairn does not have to share the subsidy burden, it is not totally free from regulatory issues. The delay in approval of its new $6 billion investment proposal in Rajasthan is responsible for its underperformance.

While the government is supposedly interested in the proposal, the Director General of Hydrocarbons is yet to take a formal decision. Cairn was already sitting on a cash balance of $1.7 billion as on March 2012, and is expected to generate an operational cash flow of $5.6 billion in the next three years.

If the proposed investment plan in India does not work out, it may consider bidding for overseas blocks having properties similar to the Rajasthan block.

Cairn India: Analysts becoming more bullish on the stock

Cairn India is already active in Sri Lanka. After hitting two successive gas discoveries in Mannar basin in that country, it has entered the second phase of exploration. A major discovery in this block can be a game-changer.

Stake sales: The intermittent stake reductions by Cairn Energy, UK, in the form of bulk sales in the market is keeping the Cairn India share price at lower levels. The former parent firm has reduced the stake by 3.5% to 18.3%.

Cairn India: Analysts becoming more bullish on the stock

Though these stake reductions create an overhang in the short term, the market will be able to absorb it since this does not affect the company’s fundamentals. Cairn India has even lined up investor friendly measures like a new dividend policy. It plans to distribute 20% of its consolidated profit as dividend.

Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month.

The consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in rating indicates that the analysts are becoming more bullish on the stock.

To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks which have been covered by at least 10 analysts.
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