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Stub is cheap, so is HZL
■ Raise target price to Rs223: We raise our HZL fair value from Rs130 to
Rs173 on faster-than-expected growth in silver earnings. Thus, our target price
for Sterlite rises from Rs215 to Rs223. We maintain OUTPERFORM on Sterlite.
■ Stock’s non-performance reflects cash flow concerns at VAL: Sterlite
has been a consensus ‘buy’ for over a year, when most base metals and
stocks have done well, including its subsidiary HZL. Yet, Sterlite’s stock
performance has languished, as market value of the ex HZL stub has been
falling steadily. We believe investors are primarily concerned about the cash
flow issues at VAL: (1) Sterlite has ~US$4 bn (Rs53/share) exposure to VAL,
as it has likely guaranteed all of VAL’s US$2.9 bn external debt, and (2) with
as much as 45% of the US$6 bn capex spent on hold, VAL may see
negative cash flows of ~US$300 mn/year. In our view, cash pressure, if any,
at Vedanta post the Cairn transaction is unlikely to directly affect Sterlite.
The present value of cash losses at VAL, if status quo persists for five years
(i.e., no access to local bauxite and coal until FY16) is ~US$1 bn (Rs14/share;
Sterlite’s attributable share Rs4), but the market is pricing in ~Rs30/share.
■ 13% FCF yield in FY13 for HZL: We believe zinc prices will stay stronger than
consensus’ expectation over the medium term. On the back of this and the
growing silver output, HZL is likely to double its EBITDA from FY10 to FY13E.
FY13E FCF yield at HZL is 12.8% on conservative silver prices (~US$29/oz).
With strong cash flows adding to the fair value, it gets cheaper everyday.
■ OUTPERFORM on zinc and silver, and reduction in risk perception: In our
SOTP valuation, we have cut the value of Sterlite’s stake in VAL from positive
Rs16 to negative Rs4, which offsets the increase in HZL’s fair value. We note
though that the current price of Sterlite is simply our fair value for HZL plus net
standalone cash—the remaining businesses are not being valued. We now see
30% potential upside for Sterlite (Rs51/share), driven in equal parts by potential
upside on HZL (Rs24/share) and on ex HZL stub (Rs27/share).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Stub is cheap, so is HZL
■ Raise target price to Rs223: We raise our HZL fair value from Rs130 to
Rs173 on faster-than-expected growth in silver earnings. Thus, our target price
for Sterlite rises from Rs215 to Rs223. We maintain OUTPERFORM on Sterlite.
■ Stock’s non-performance reflects cash flow concerns at VAL: Sterlite
has been a consensus ‘buy’ for over a year, when most base metals and
stocks have done well, including its subsidiary HZL. Yet, Sterlite’s stock
performance has languished, as market value of the ex HZL stub has been
falling steadily. We believe investors are primarily concerned about the cash
flow issues at VAL: (1) Sterlite has ~US$4 bn (Rs53/share) exposure to VAL,
as it has likely guaranteed all of VAL’s US$2.9 bn external debt, and (2) with
as much as 45% of the US$6 bn capex spent on hold, VAL may see
negative cash flows of ~US$300 mn/year. In our view, cash pressure, if any,
at Vedanta post the Cairn transaction is unlikely to directly affect Sterlite.
The present value of cash losses at VAL, if status quo persists for five years
(i.e., no access to local bauxite and coal until FY16) is ~US$1 bn (Rs14/share;
Sterlite’s attributable share Rs4), but the market is pricing in ~Rs30/share.
■ 13% FCF yield in FY13 for HZL: We believe zinc prices will stay stronger than
consensus’ expectation over the medium term. On the back of this and the
growing silver output, HZL is likely to double its EBITDA from FY10 to FY13E.
FY13E FCF yield at HZL is 12.8% on conservative silver prices (~US$29/oz).
With strong cash flows adding to the fair value, it gets cheaper everyday.
■ OUTPERFORM on zinc and silver, and reduction in risk perception: In our
SOTP valuation, we have cut the value of Sterlite’s stake in VAL from positive
Rs16 to negative Rs4, which offsets the increase in HZL’s fair value. We note
though that the current price of Sterlite is simply our fair value for HZL plus net
standalone cash—the remaining businesses are not being valued. We now see
30% potential upside for Sterlite (Rs51/share), driven in equal parts by potential
upside on HZL (Rs24/share) and on ex HZL stub (Rs27/share).
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