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Cairn India: A bizarre conglomeration - Outside View by Luke Verghese
 
 
Cairn India: A bizarre conglomeration

The flag bearer pretenders

The annual reports of the flag bearer pretenders of India Inc appear to getting more and more 'exotically weird' by the year. The emphases today is as much or even more in creating diversions through the a medley of subsidiaries, and step downs, and assorted other seeming subterfuges, as is on the basic task of getting the main business going. It is difficult to understand what public good is generated by resorting to such guises. If indeed the motive is to confuse and obfuscate, why even bother to resort to public issues of capital, and make a mockery of the whole exercise in the process.

Some of the annual reports surveyed so far, such as the likes of Cadila Healthcare, Matrix Laboratories, Kirloskar Electric, and SPIC (Southern Petrochemical Industries Corporation) have taken to flights of fantasy. There are numerous others too, but not named here. Cairn India joins this list. If nothing else, the managements of these companies should be appointed as advisors to the Finance Minister. At least they can help turn a rather hopeless Ways and Means position of the Central Government into a delectable apple pie.

The four year old pup

Cairn India is a four year old pup, incorporated under Indian laws with the objective of finding oil, petroleum, and gas and then going vertically up the value chain, or so the notes to the balance sheet tell us. But Cairn Energy Plc, the Scottish parent, has been prospecting for oil in India a lot longer. The directors' report informs that Cairn has been in India for some 15 years, initially with the operating rights in the Ravva block in the Krishna-Godavari basin (K-G basin) in Andhra Pradesh. From Ravva, the next success story was Cambay, off the Gujarat coast, and further on, 25 discoveries in Rajasthan including the landmark Mangala discovery. The initial Rajasthan saga it says is pure moonshine, a mere blip on the radar screen, as it has discovered other fields like Bhagyam and Aishwarya. It is now exploring the potential of future developments in a further 22 discoveries including the Barmer Hill tight reservoir. Further, it is conducting other onshore and offshore seismic surveys in other parts of India and off the coast of Sri Lanka. As the chairman of the board of Cairn India, Sir Bill Gammell puts it across in simple English, when the Rajasthan fields are in production, Cairn India along with its joint sector partner ONGC, will account for more than 20% of India's overall oil output.

So what has Cairn India got to do with all this? Sir Bill didn't get it quite right, as Cairn India is at present a name plate company with a large net worth, zero fixed assets, and oodles of money locked into an investment portfolio. As on March 31, 2010 it had an equity capital base of Rs 18.9 bn, a net worth of Rs 334 bn, fixed assets of Rs 1 m, and an investment portfolio with a book value of Rs 331 bn. It also registered revenues of Rs 1.6 bn for the year FY10, almost all of it in the form of other income, and recorded a loss before taxation of Rs 733 m.

The oil blocks

Cairn India is a participant in a few oil and gas blocks, or what are known as 'jointly controlled assets' through production sharing contracts granted by the Central government, along with other joint venture partners. Sounds pretty complicated what? It presently has a participating interest through its subsidiaries in an oil and gas block in the Palar basin (the East Coast), and in the K-G basin, with a 25% stake in each block. (Another page informs us that Cairn India has a 35% ownership in the Palar basin block, and a 49% ownership in the K-G basin block.) This is getting slightly complicated, but let it be. It also has a holding in two non operated blocks, one in the Gujarat basin, and one in the Kerala-Konkan basin, with a 49% and a 40% stake each. Besides, it has also relinquished its interest in three blocks, one in Madhya Pradesh (the Vindhyan onshore), and one block each in Cambay onshore, and Rajasthan onshore. So, effectively, what Cairn India holds by proxy today, are the two operating blocks, and the two non-operating blocks. According to the annual report, the company has commenced drilling in the K-G basin, and intends to commence drilling in the Palar basin shortly.

Cairn as holding company

In the given scenario, Cairn India will continue to play the role of a holding company, (of the oil blocks that it wins for exploratory rights), and its primary income streams, will continue to be 'other income' related. This is because the exploratory rights are not 'outright' rights, but merely 'partnership' rights. And this compels the parent to float new JVs. But Cairn India has other achievements to its credit. In the short span of 4 years, (following the public issue of capital in Dec 2006 which netted the company Rs 88 bn) it has found the resources to bring to life two subsidiary ventures, Cairn India Holdings UK, which is based out of Jersey, and CIG Mauritius Holdings Private Ltd which paradoxically is based out of Mauritius. It has acquired 420 m equity shares of Cairn India UK with a face value of GBP 1, for Rs 300 bn, at an average price of Rs 714 per share. It has also invested in the preference capital of this company, with a face value of GBP 1,000 each, to the tune of Rs 13.4 bn, at an average price of Rs 76,542 per share. That is a combined investment of Rs 314 bn in this company. Concurrently, it has equity investments in the Mauritian subsidiary, with a face value of USD 1, to the tune of Rs 611 m, at an average price of Rs 46.5 per share. (The paid up capital of Cairn India Holdings UK is Rs 49 bn and the paid up capital of CIG Mauritius is Rs 611 m. There appears to be some sort of an anomaly here. The breakup of the paid up capital of Rs 49 bn of Cairn India Holdings UK, the subsidiary of Cairn India, is not available. Cairn India holds 420 m equity shares but the face value adds up to only Rs 29.4 bn assuming the rupee par value of Rs 70 per share relative to the pound sterling. We are talking here about a paid up capital of a subsidiary which is a lot larger in rupee terms.) For the matter of record Cairn India is a 62.4% equity subsidiary of Cairn UK Holdings Ltd. Cairn UK's holdings are down from 64.67% in the preceding year (the other big shareholder is Petronas International Corporation with a 14.9% stake). Cairn UK in turn is a fully owned subsidiary of Cairn Energy Plc, UK, which is the ultimate holding company.

The many subsidiaries

The net result of its investments in its two subsidiaries is that, Cairn India got control of another 29 subsidiaries, or what are called step down subsidiaries (subsidiaries of subsidiaries). This is where the story really gets interesting. Besides the stake in the capital of its subsidiaries, the parent also has other capital account transactions with them. It is due loans and advances from them at year end of Rs 242 m, and it owes them Rs 673 m. This is really small change, given the mega buck figures that oil companies deal in. The 29 subsidiaries include 9 companies based out of Netherlands, and another 7 companies, based out of Australia. Why the Netherlands based companies and the Australian based companies have been parceled out to the Indian company is not known, but the management in its wisdom has thought it the right thing to do. Then there are two companies operating out of Mauritius, one in British Virgin Islands, one in Jersey, one in Singapore and one based out of Sri Lanka. Mauritius, Jersey, and British Virgin Islands are the favored destinations to keep all matters on the secret side. As a matter of fact, there are so many subsidiaries, that even the management is having difficulty keeping track of them. So much so that Cairn India has decided to merge three of its Netherlands based holding companies and its Australia based subsidiary, Cairn Energy India Pty Ltd, with Cairn India. (Why would a company based out of Australia be called 'India'?) But that would still leave a large number of sidekicks.

The performance quotient

It is the performance quotient of these subsidiaries etc that really titillates. Collectively the 31 subsidiaries have a paid up equity of Rs 212 bn. The interesting feature is that not one of them declared a dividend for the year in which they have declared their results. In terms of opportunity costs of capital that is a lot of money lost to the companies that own these shares. They also have total assets of Rs 367 bn, and seven of them have investments (mostly in mutual funds) adding up to Rs 307 m. The only other investment being an equity stake in Videocon Industries, which is a partner in one of its oil exploration ventures. Only 6 of the 31 companies have generated revenues, totaling Rs 16.2 bn. But 25 of them have managed the incredulous feat of toting up either pretax profits or losses, with the aggregate profits adding up to Rs 23 bn. Unless I am missing something here, this is simply in the realm of the supernatural, as the pretax profits can never be greater than the revenues. Profits or losses are the end product of revenues, and not the other way around. The only exception to this, that one can postulate, is in the incurring of pre-operative losses. Operating losses can however be much higher than the revenues.

The statistics

Take a look at the stats. Two of the Netherlands based subsidiaries, Cairn Energy Group Holdings BV, and Cairn Energy India Holdings BV, have registered pretax profits of Rs 5.2 bn and Rs 5.1 bn respectively, but on zilch revenues. Cairn Energy Hydrocarbons registered a turnover of Rs 3.5 bn, but netted a pretax profit of Rs 5.6 bn. Cairn India's own subsidiary, Cairn India Holdings Ltd managed a pretax loss of Rs 3.6 bn, but on zilch revenues. These are only some of the more bizarre entries. Anything is possible it appears, so long as the imagination wills it. Seriously, one also wonders on what basis Anil Agarwal made a bid for Cairn India.

As a matter of fact the company that is really ruling the roost here is none other than Cairn Energy India Pty Ltd. This is quite evident as the vast bulk of the eye-popping remuneration package that is farmed out to the senior management is being routed through this company. Cairn India you see is in a position to pay only the petty cash expenses. Together, the top three honchos, Rahul Dhir, Rick Scott, and Indrajit Banerjee were paid a collective remuneration of Rs 353 m in FY10, a figure far beyond the ability of Cairn India to even mull.

The merger of Cairn Energy India Pty Ltd with Cairn India is in every sense of the term, very good news in particular to the minority shareholders of the latter. The merger, if nothing else, will allow the company to declare a dividend to its public shareholders, which is well nigh impossible today. On revenues of Rs 9.2 bn, the company could afford to report a pretax profit of Rs 5.9 bn or a pretax margin of a little over 64%. But the paid up capital base is close to Rs 22 bn. What is important in the emerging equation however, is what the capital base of the new merged entity will be.

Footnote

It will help if the government makes it mandatory for companies having siblings and offspring, especially based out of exotic locales, to clearly spell out the pressing need for creating such entities. This will have the effect of putting all the cards on the table.

Disclosure: Please note that I am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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1 Responses to "Cairn India: A bizarre conglomeration"

Ramana Kumar

Dec 19, 2010

Some good observations. It is easy for investors to think that buying Cairn stock is a good strategy to get benefit from rising crude oil prices. But it looks like that may be too simplistic. It mite be better to stick Indian Oil PSUs !

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