Buy Cairn India; target of Rs 230: Axis Direct

Vedanta’s revised offer enhances probability of deal getting through as: Minority shareholders will be benefited by diversified cash flow of a conglomerate, and de-risk earnings/ stock price volatility arising from exposure to single commodity (crude). Cairn shareholders can benefit from exposure to Vedanta’s long life/low cost assets and can participate in rerating of Vedanta stock. Regulatory approvals: ONGC has recommended extension of PSC till 2030 at same fiscal terms. Also, management expects approval from oil ministry is more procedural given that no change of control.

We increase our FY17E PAT by 16% to reflect (a) higher crude price assumption of US$45/bl(US$40/bl earlier), (b) higher depreciation charges, and (c) lower other income.However, we increase our target price to Rs 230/sh (from Rs 145/sh earlier) as (a) we now fully value cash vs. 50% discount earlier (benefit of ~Rs 65/sh),and (b) increasing peak production of 200 kbpd by 2020 vs. 190 kbpd earlier (benefit of ~Rs 15/sh). Upgrade to BUY.