Cairn India Ltd., operator of the nation’s biggest oil field on land, headed for its biggest drop in more than five years after a loan given to its parent raised investor concerns about the use of its cash reserves.
The shares slumped as much as 6.9 percent to 321.65 rupees, the most since April 16, 2009, and traded at 321.75 rupees as of 1:49 p.m. in Mumbai. Cairn India, controlled by billionaire Anil Agarwal’s Vedanta Resources Plc, lent $1.25 billion to the parent during the quarter ended June 30, several brokerages said in client reports today.
“We note that such related party transactions typically raise market concerns about conflict of interest on the most shareholder-friendly way of deploying surplus cash,” Goldman Sachs Global Investment Research, which has a sell recommendation on the stock, said in its note.
Cairn India had $3.2 billion of cash reserves as of June 30, according to its earnings statement released yesterday.
Neerja Sharma, director of assurance and communications, and company secretary at Cairn India, didn’t answer four calls on her mobile-phone seeking comment.
The loan was advanced at a time when Cairn India has a three-year plan to spend $3 billion on drilling more wells in its biggest deposit, in the northwestern state of Rajasthan. It expects to achieve as much as 10 percent annual growth in output for the three years beginning April 2015.
“The apprehension among investors that Cairn India’s cash will be drawn out for other use has now come true,” said Daljeet S. Kohli, head of research at IndiaNivesh Securities Pvt. “The share price fall is just a reflection of their concern.”
Oil and gas output from the area in the quarter ended June 30 declined 4 percent sequentially due to an unplanned shutdown in May.
Cairn India, based in Gurgaon near New Delhi, yesterday reported its lowest profit in 11 quarters. Group net income declined 65 percent in the first quarter ended June 30 from a year earlier, missing the median of 31 analyst estimates compiled by Bloomberg.
Profit fell as the company booked a charge of 16.3 billion rupees after adopting new guidelines to calculate depreciation of oil and gas assets, it said.