PINC Event Update – Sesa Goa acquires stake in Cairn India; Concerns factored in – Downgrade to HOLD

Sesa Goa has acquired, subject to approvals, 20% strategic stake in Cairn India for a consideration of ~USD3.0bn, as a part of the transaction with parent company Vedanta Resources (VED). Jointly, they would acquire a controlling stake of 51-60% in India's 2nd largest private sector oil company for USD8.6-9.5bn.

Investment arguments: 1) Immediately EPS accretive: Higher investment returns – 11% ROI in Cairn (based on consensus estimate) vs. <5% treasury return, 2) Leveraging Vedanta's execution & exploratory capabilities.

Concerns: 1) Diversification in unrelated business, 2) Large capex required in developing Cairn's exploratory blocks.

VALUATIONS AND RECOMMENDATION

The deal seems expensive at 12.4x FY11E EV/EBITDA (consensus estimates). We revise our EPS estimates and target price to factor in the transaction. We downgrade the stock to 'HOLD' with a revised target price of Rs335 (iron ore assets valued on DCF, Cairn stake @ 20% holding company discount to CMP).

Source : Equity Bulls

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