New Delhi/Mumbai, July 1: Cairn India’s profit from the Rajasthan oilfield is expected to dip $1.68 billion because of the royalty clause set by the government for a stake sale to Vedanta, while ONGC is likely to earn $721 million over the life of the field.

The tough riders tagged on to the approval did not weigh on the Cairn India stock, which rose almost 5 per cent.

The government’s condition will lower Cairn India’s profit over the approved life of the field lasting 2020 to $5.75 billion from $7.43 billion, sources said. The numbers have been calculated on the basis of a peak output of 175,000 barrels a day and a crude oil price of $70 per barrel.

The cabinet committee on economic affairs yesterday said the royalty from the Rajasthan fields must be cost-recoverable against the current practice of ONGC paying the entire royalty.

“With royalty made cost recoverable, our valuation for the Mangala, Bhagyam and Aishwarya fields is negatively impacted by Rs 50 per share and we should see a hit on the stock with this decision,” Alok Deshpande, analyst at Elara Securities, said in a research note today. The brokerage downgraded the Cairn India stock to sell from reduce.

The stock market shook off such concerns. On the BSE, shares of Cairn India rose 4.81 per cent, or Rs 14.95, to close at Rs 325.70.

Market circles said the rise was because the cabinet clearance had put an end to the uncertainty over the deal. “The condition of cost recoverability has already been discounted by the market,” a dealing room official said.

Although there are worries over the impact of the royalty share condition on Cairn India, ONGC is expected to be a major gainer.

“The decision comes in as a big positive for ONGC as it should save $38-45 million for 2012-13 at the current crude prices. The EPS impact will be in the range of 8-10 per cent for ONGC,” Deshpande added. It is also felt that the development will give a filip to ONGC’s proposed follow-on public offer.

The Mangala oilfield at Barmer in Rajasthan started production in August 2009. ONGC paid a royalty of Rs 1,289 crore for crude oil produced in 2010-11 and Rs 84.47 crore in 2009-10. ONGC is liable to pay royalty not just on its own share from the field, but also on Cairn’s 70 per cent.

Officials said cost recovery of the royalty would mean ONGC would get $721.37 million over the life of the field against a negative cash flow of $3.18 billion earlier.

ONGC officials said, “The retrospective cost recoverable calculations are being done….but we cannot comment on the future profits as it depends on various factors, including crude prices.”

The royalty would be added to project costs, which would be deducted from oil sale revenues before the profits are split between the partners and the government.

According to estimates, the government’s share of profit will fall to $3,601.21 million from $5,188 million because of the cost recovery clause.