Stock Views on CAIRN INDIA, NESTLE

NOMURA  on NESTLE

Nomura upgrades the rating on Nestle India to `Buy' from `Reduce' with a target price of 320. The stock has significantly underperformed so far this year largely on account of concerns surrounding higher input prices and increased competition. This has also been the primary catalyst for the street downgrading estimates. With the input cycle turning in their favour, operating margins are likely to expand significantly. The analysis suggests that for every 1% decline in prices of key inputs, margins improve 25 bps and PAT improves 1.3%. From a long-term perspective, premium valuations are justified given that Nestle offers an excellent play on urban consumption. The company operates in the fast growing, yet underpenetrated processed food opportunity in India and hence, sustainability of earnings is significantly higher than other consumer names. The recent weakness is an excellent opportunity to enter the stock.

EDELWEISS  on CAIRN INDIA

Edelweiss maintains 'Hold' rating on Cairn India with a target price of 355. Vedanta Group will acquire 51-60% stake of Cairn India for an aggregate consideration of $8.5-9.6 billion in cash. Any shortfall in the open offer to achieve the 20% level by Sesa Goa would be met by purchase of Cairn India shares from Vedanta at a price of 405/share. After the open offer, it is expected that Vedanta will hold 31-40% of Cairn India directly, while Sesa Goa will hold a 20% interest. While the deal for oil and gas assets is for 355/share, the non-compete fee is a negative surprise for the minority shareholders. While maintaining earnings estimates and target price of 323/share, the stock should trade higher than its fair value, considering the impending open offer at 355/share. Assuming that the acceptance is 53%, the stock's fair value pre-open offer is 340/share. Moreover, the market may price the stock at a discount to fair value, considering Vedanta Group's inexperience in the oil and gas space. Delay in obtaining regulatory approvals from GoI could be a risk to the estimate.