Cairn India IPO: Betting on oil prices

08 December 2006

Though Cairn India has a very successful track record in oil exploration, subscribing to the nearly $1.5-billion IPO is almost like taking a bet on future crude oil prices, cautions Rex Mathew.

Cairn India, one of the most successful oil exploration companies in the country, is launching a mega-IPO - one of the biggest ever in the history of our primary markets. The issue offers an opportunity for investors to take an exposure to a pure-play oil exploration company, though the valuations are slightly on the higher side as can be expected when oil prices are high and stock markets are at lifetime highs.

Cairn India is offering 538,470,588 equity shares, including an offer for sale from parent company Cairn Plc, at a price band of Rs160 to Rs190. The issue would raise Rs8,616 crore at the lower end of the price band and Rs10,231 at the upper end. At the higher end, Cairn India would be valued at Rs33,544 crore ($7.54 billion) and at Rs28,248 crore ($6.35 billion) at the lower end.

Out of the total shares on offer, the company has made a pre-IPO placement of nearly 210 million shares to raise around Rs3,700 crore ($822 million). The placement was lapped up by investors including Malaysian oil major Petronas and Videocon group - which also has interests in exploration - at a price of Rs176.48 per share. Cairn Energy Plc would hold a 69.5-per cent stake in Cairn India after the completion of the IPO while the rest would be held by institutional and minority shareholders.

Currently, the operating interests of Cairn group in India are spread over various subsidiaries. Cairn group has devised a scheme to restructure the various subsidiaries and bring them all under the control of Cairn India. To this effect, Cairn India has signed agreements to acquire the whole of Cairn India Holdings, which is the holding company for various operating subsidiaries in India. The company would utilise part of the issue proceeds for the acquisition.

From the issue proceeds more than two-thirds - approximately between Rs6,000 crore and Rs7,000 crore depending on the final issue price - would go to parent company Cairn Energy Plc for acquiring Cairn India Holdings. The balance would be retained by Cairn India for developing its oil fields and setting up production facilities besides exploration and development activities in other blocks.