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Sterlite Industries (STLT IN)
OW: Key takeaways from STLT corporate day
Management outlook on business remains buoyant; expect
receding headwinds
Zinc assets will likely stay with STLT; Gamsberg will take
cUSD1bn and c4 years to develop
Maintain OW rating and INR210 target price
At the STLT corporate day hosted on 23 February 2011, management’s business outlook
continued to stay buoyant with respect to ongoing capital spending and project execution,
commodity pricing, and receding political headwinds. Here are our key takeaways:
Zinc
Newly acquired Zinc mines (Skorpion, Lisheen & Black Mountain) from Anglo
American will likely reside in the STLT balance sheet and not with HZ, as originally
planned.
The Gamsberg project will likely require cUSD1bn of capex and four years to
develop. The mine has the potential to produce c400ktpa of zinc.
Power
The incremental investment for creating the Transmission link from the SEL
generating station to the closest PGCIL grid will likely be miniscule (cUS$20m).
The revised synchronization dates of the Jarsuguda power project of SEL are in line
with our estimates; should enter FY12 with rated capacity of c1200MWs.
Captive coal assets
The Durgapur II Taraimar coal mine for CPP at BALCO will likely commission in
September 2011. This mining project has already received Stage1 forest clearance and
will have to acquire c250 acres of private sector land.
The Rampia coal block allocated for the SEL Jarsuguda Power project is still in the
initial stages and management maintained mid-2012 as the commissioning date. We
suspect this could get delayed further. In addition, HZ’s Madanpur coal block
continues to be in the ‘NO GO’ zone.
Other details
Minority stake acquisition: STLT has not yet challenged the arbitration panel’s
decision in higher court; will contest at a later time
STLT’s investments in VAL: stand at INR77b as of Dec-10; cINR40b higher than
that required by the ownership structure; mgmt expect to correct this in FY12e.
Valuation and risks
Our primary valuation for Sterlite is based on 6.5x FY12e EV/EBITDA. Accordingly, our target price for
Sterlite is INR210/share, which comprises INR80/share in Hindustan Zinc, INR11/share for Balco,
INR27/share of Sterlite’s copper operations, INR9 in Vedanta Aluminium, INR6 in Copper Mines of
Tasmanina, INR21/share for Sterlite Energy and 52/share in net cash.
We value Sterlite Energy (SEL), based on an average of DCF-to-firm, DCF-to-Equity and Justified P/BV
basis. Our DCF-to-equity valuation is based on debt-to-equity ratio of 1:1 and cost of equity of 15%.
Similarly, we assume a cost of equity of 15% in our DCF-to-equity valuation method. Justified price-tobook ratio is theoretical P/B ratio based on returns on equity generated by a project, our assumption of
equity (15%) and terminal growth rate (2.5%). Increasing the equity funding by 10% (DER 40:60) will
result in a 20% drop in target valuation of SEL, but has limited (2%) impact on target price of STLT. SEL
filed a Draft Red Herring Prospectus in October 2009 to raise INR51bn (USD1,085m) for an unspecified
stake. Assuming successful offering and dilution range between 10-25%, SEL’s pre-money valuation
could range between USD4.3bn and USD10.8bn, the top end of which is substantially higher than the
estimate factored into our valuation.
The stock offers a potential return of 27% from current market price of INR169, and hence we rate it
Overweight.
Lower commodity prices and delay commissioning of expansion projects form a downside risk to our
estimates. Copper forms c13% of Sterlite’s business and hence closure of the smelter at Tuticorin can
form downside risks to our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (STLT IN)
OW: Key takeaways from STLT corporate day
Management outlook on business remains buoyant; expect
receding headwinds
Zinc assets will likely stay with STLT; Gamsberg will take
cUSD1bn and c4 years to develop
Maintain OW rating and INR210 target price
At the STLT corporate day hosted on 23 February 2011, management’s business outlook
continued to stay buoyant with respect to ongoing capital spending and project execution,
commodity pricing, and receding political headwinds. Here are our key takeaways:
Zinc
Newly acquired Zinc mines (Skorpion, Lisheen & Black Mountain) from Anglo
American will likely reside in the STLT balance sheet and not with HZ, as originally
planned.
The Gamsberg project will likely require cUSD1bn of capex and four years to
develop. The mine has the potential to produce c400ktpa of zinc.
Power
The incremental investment for creating the Transmission link from the SEL
generating station to the closest PGCIL grid will likely be miniscule (cUS$20m).
The revised synchronization dates of the Jarsuguda power project of SEL are in line
with our estimates; should enter FY12 with rated capacity of c1200MWs.
Captive coal assets
The Durgapur II Taraimar coal mine for CPP at BALCO will likely commission in
September 2011. This mining project has already received Stage1 forest clearance and
will have to acquire c250 acres of private sector land.
The Rampia coal block allocated for the SEL Jarsuguda Power project is still in the
initial stages and management maintained mid-2012 as the commissioning date. We
suspect this could get delayed further. In addition, HZ’s Madanpur coal block
continues to be in the ‘NO GO’ zone.
Other details
Minority stake acquisition: STLT has not yet challenged the arbitration panel’s
decision in higher court; will contest at a later time
STLT’s investments in VAL: stand at INR77b as of Dec-10; cINR40b higher than
that required by the ownership structure; mgmt expect to correct this in FY12e.
Valuation and risks
Our primary valuation for Sterlite is based on 6.5x FY12e EV/EBITDA. Accordingly, our target price for
Sterlite is INR210/share, which comprises INR80/share in Hindustan Zinc, INR11/share for Balco,
INR27/share of Sterlite’s copper operations, INR9 in Vedanta Aluminium, INR6 in Copper Mines of
Tasmanina, INR21/share for Sterlite Energy and 52/share in net cash.
We value Sterlite Energy (SEL), based on an average of DCF-to-firm, DCF-to-Equity and Justified P/BV
basis. Our DCF-to-equity valuation is based on debt-to-equity ratio of 1:1 and cost of equity of 15%.
Similarly, we assume a cost of equity of 15% in our DCF-to-equity valuation method. Justified price-tobook ratio is theoretical P/B ratio based on returns on equity generated by a project, our assumption of
equity (15%) and terminal growth rate (2.5%). Increasing the equity funding by 10% (DER 40:60) will
result in a 20% drop in target valuation of SEL, but has limited (2%) impact on target price of STLT. SEL
filed a Draft Red Herring Prospectus in October 2009 to raise INR51bn (USD1,085m) for an unspecified
stake. Assuming successful offering and dilution range between 10-25%, SEL’s pre-money valuation
could range between USD4.3bn and USD10.8bn, the top end of which is substantially higher than the
estimate factored into our valuation.
The stock offers a potential return of 27% from current market price of INR169, and hence we rate it
Overweight.
Lower commodity prices and delay commissioning of expansion projects form a downside risk to our
estimates. Copper forms c13% of Sterlite’s business and hence closure of the smelter at Tuticorin can
form downside risks to our estimates.
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