The Vedanta Group's proposed restructuring may have implications for Cairn India's distribution policy and ability to plough back cash into its business.
For a company which so far refrained from distributing profits to shareholders, the new dispensation in which Sesa-Sterlite will hold 58.9 per cent stake in Cairn India, may likely see a change in pattern.
Dividend plans
Before its acquisition by Vedanta last calendar, Cairn India under the control of Cairn UK had not declared any dividends. With its Rajasthan asset in ramp-up mode, the company ploughed back its profits into the business. But now, though further output increase in the Rajasthan fields is expected, the Cairn India management has indicated at dividend payouts being in the offing.
Speaking at the conference call to announce the restructuring, Mr Rahul Dhir, CEO, Cairn India, had said “the intent of the Cairn India board is to declare a dividend which will be based on a fixed payout. In addition to that, the board will also consider a one-time payout as well looking at the strength of the balance sheet.”
More liberal payouts may in fact become a regular theme for Cairn India henceforth. Dividends paid by it will come in handy for its new parent, Sesa-Sterlite, in servicing the financing cost of around $300 million on the debt ($5.9 billion) taken on from Vedanta along with its 38.8 per cent stake in Cairn India.
Solid asset
Of the various natural resource companies that Sesa-Sterlite has taken over in last week's deal, Cairn India is among the more profitable and cash-rich. It has a solid balance sheet (net cash of Rs 6,460 crore as of December end), robust cash flow from operations of Rs 2,135 crore for the latest quarter and a net profit margin in excess of 70 per cent.
With production from the Rajasthan fields set to rise further and strong realisations, the company is expected to continue its good operational performance.
Going forward, other forms of cash support from Cairn India to other group entities which require funding, too, cannot be ruled out.
Market's concern
The market too does not seem enthused about the effect of the proposed restructuring on Cairn India's prospects. There are concerns that the company may be used as a cash cow to bankroll expansion plans of other cash strapped businesses belonging to the parent.
The stock, which had a solid run over the past few months, has shed close to 4 per cent since the restructuring announcement last weekend.
Filing of the public interest litigation questioning the original Cairn-Vedanta deal and a moderation in the price of crude oil over the past couple of days also seem to have taken a toll.