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UBS Investment Research
Sesa Goa
Acquires 10.4% in Cairn from Petronas
Event: Sesa Goa acquires 10.4% stake in Cairn India from Petronas
Sesa has acquired 10.4% stake (200mn shares) at Rs331/share for Rs66.2bn
(US$1.5bn) in Cairn India from Petronas. This will be in addition to the Open offer
for acquiring 20% stake in Cairn India (offer closes on 30th April 2011). Sesa will
own between 20%-30.4% in Cairn India (vs 20% earlier) depending on the success
of the open offer and Vedanta will own between 51%-70.4%.
Impact: Lowers average acquisition cost; Sesa may own > 20% in Cairn;
1) If Sesa acquires 20% from open offer (at Rs355/share), its average cost for
30.4% stake in Cairn will be Rs347/share (total investment of US$4.5bn) 2) If Sesa
acquires nothing in the open offer, its average cost will be Rs367/share for 20%
stake (total investment of US$3.1bn – it will buy 9.6% from Vedanta/Cairn at
Rs405/share). Key downside of acquiring more than 20% stake in Cairn: Sesa will
have to raise further debt but it has cash/cash equivalent of Rs86bn (US$1.9bn) as
of Dec 2010 and it can raise debt to fund the additional stake.
Action: Upside to valuation as average acquisition cost is likely to be lower
There is likely to be an upside of 5.8%/4.5% to our target price respectively in
scenarios (1) and (2) above, as we have factored in a higher average acquisition
cost of Rs405/share in our estimates.
Valuation: maintain Buy rating and price target of Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses (iron ore
and others) valued at 4.5x EV/EBITDA (FY13E EBITDA) and Cairn India at
Rs332/share (20% discount to our price target of Rs415).
Event
Sesa has bought 200mn shares of Cairn India (10.4% stake) at Rs331 per share
from Petronas. Petronas has sold its entire 14.9% stake in Cairn India (balance
sold to institutions). We have currently factored in higher acquisition cost at
Rs405/share for 20% stake in Cairn India (instead of the Rs355 open offer price).
Scenarios
Sesa Goa will hold a minimum of 20% in Cairn India and maximum of
30.4% in Cairn India depending on the success of the open offer (vs 20%
earlier).
Vedanta group (incl Sesa) will own between 51-70.4% stake in Cairn India
post completion of the entire transaction (vs 51-60% earlier).
Depending on the success of the open offer, following scenarios will emerge:
Sesa Goa acquires between 0% and 0.6% in the open offer: In this case, Sesa
Goa will buy between 9.6% and 9.0% from Vedanta/Cairn at Rs405/share,
such that its stake is 20% (including the 10.4% stake acquired from Petronas).
Vedanta will own 31% stake such that Vedanta group will own 51% stake.
Sesa Goa acquires between 0.6% and 9.6% in the open offer: In this case,
Sesa Goa will buy between 9% and 0% from Vedanta/Cairn at Rs405/share,
such that its stake is 20% (including the 10.4% stake acquired from Petronas).
Vedanta will own between 31 and 40% stake such that Vedanta group will
own between 51% and 60% stake.
Sesa Goa acquires 9.6% in the open offer: In this scenario, Sesa Goa will not
buy anything from Vedanta/Cairn and will hold 20%. Vedanta’s will own
40% stake (at Rs405/share) such that Vedanta group will own 60%.
Sesa Goa acquires between 9.6% to 20% in the open offer: In this case, Sesa
Goa will eventually hold between 20% to 30.4% in Cairn India. It will not
buy anything from Vedanta/Cairn. Vedanta will own 40% stake (at
Rs405/share) such that Vedanta group will own between 60%-70.4%
depending on how much Sesa gets in the open offer.
Impact
We analyse the impact on valuations in two extreme scenarios:
If Sesa acquires 20% from open offer (at Rs355/share): Sesa Goa will own
30.4% stake in Cairn India i.e., 10.4% stake acquired at Rs331/share from
Petronas and 20% stake acquired at Rs355/share from the open offer
In this case its average cost for 30.4% stake in Cairn will be Rs347/share
(total investment of US$4.5bn). However, key downside of acquiring more
than 20% stake in Cairn is that Sesa will have to raise further debt to fund the
additional stake. However, it has cash/cash equivalent of Rs86bn as of Dec
2010 (US$1.9bn) and we believe it can raise debt to fund the additional stake.
There is likely to be an upside of Rs23/share to our target price, as we have
factored in a higher average cost of Rs405/share.
If Sesa acquires nothing in the open offer: Sesa will own 20% stake in Cairn
India i.e., 10.4% stake acquired at Rs331/share from Petronas and 9.6% stake
acquired at Rs405/share from Vedanta/Cairn
In this case, Sesa’s average cost will be Rs367/share for 20% stake (total
investment of US$3.1bn). There is likely to be an upside of Rs18/share to
our target price as we have factored in average cost of Rs405/share for
acquiring 20% stake (US$3.5bn).
Valuations – Sesa Goa
We retain Buy on Sesa Goa with a price target of Rs400. We continue to value
Sesa on 4.5x EV/EBITDA (Mar 2013E EBITDA). We value 20% stake in Cairn
India at UBS’s SOTP price target of Rs415/share and apply 20% holdco
discount.
Our bear case valuation for Sesa (assuming a higher royalty of 20% instead of
current 10%) is Rs327/share.
Table 1: Price target derivation
Rs m Revised
EBITDA - March 2013 60,598
Target EV/EBITDA multiple (x) 4.5
Target EV 272,692
Net cash - March 2012 (55,795)
Target Market Cap ex-stake in Cairn India 216,897
Price target for core business (Rs/share) 252
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Price target for Cairn India stake 148
Price target (Rs/share) 401**
Source: UBS estimates **Rounded off to Rs400 *Earlier EBITDA estimate was based on Dec 2012 EBITDA.
Bear Case Valuation
Recent media reports indicated that the government may increase royalty rate
(currently 10% ad valorem) instead of imposing a 26% mining tax profit. If we
assume royalty rate to increase to 20% (instead of 10%), Sesa Goa’s EPS for
FY12/13 would decline to Rs33/32 and price target would decline to Rs327.
Table 2: Price target derivation – Bear Case
Rs m
EBITDA - March 2013 47,838
Target EV/EBITDA multiple (x) 4.5
Target EV 215,269
Net cash - March 2012 (61,636)
Target Market Cap ex-stake in Cairn India 153,632
Price target for core business (Rs/share) 179
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Price target for Cairn India stake 148
Price target (Rs/share) 327
Source: UBS Estimates
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sesa Goa
Acquires 10.4% in Cairn from Petronas
Event: Sesa Goa acquires 10.4% stake in Cairn India from Petronas
Sesa has acquired 10.4% stake (200mn shares) at Rs331/share for Rs66.2bn
(US$1.5bn) in Cairn India from Petronas. This will be in addition to the Open offer
for acquiring 20% stake in Cairn India (offer closes on 30th April 2011). Sesa will
own between 20%-30.4% in Cairn India (vs 20% earlier) depending on the success
of the open offer and Vedanta will own between 51%-70.4%.
Impact: Lowers average acquisition cost; Sesa may own > 20% in Cairn;
1) If Sesa acquires 20% from open offer (at Rs355/share), its average cost for
30.4% stake in Cairn will be Rs347/share (total investment of US$4.5bn) 2) If Sesa
acquires nothing in the open offer, its average cost will be Rs367/share for 20%
stake (total investment of US$3.1bn – it will buy 9.6% from Vedanta/Cairn at
Rs405/share). Key downside of acquiring more than 20% stake in Cairn: Sesa will
have to raise further debt but it has cash/cash equivalent of Rs86bn (US$1.9bn) as
of Dec 2010 and it can raise debt to fund the additional stake.
Action: Upside to valuation as average acquisition cost is likely to be lower
There is likely to be an upside of 5.8%/4.5% to our target price respectively in
scenarios (1) and (2) above, as we have factored in a higher average acquisition
cost of Rs405/share in our estimates.
Valuation: maintain Buy rating and price target of Rs400
We continue to value Sesa on a sum-of-the-parts basis, with its businesses (iron ore
and others) valued at 4.5x EV/EBITDA (FY13E EBITDA) and Cairn India at
Rs332/share (20% discount to our price target of Rs415).
Event
Sesa has bought 200mn shares of Cairn India (10.4% stake) at Rs331 per share
from Petronas. Petronas has sold its entire 14.9% stake in Cairn India (balance
sold to institutions). We have currently factored in higher acquisition cost at
Rs405/share for 20% stake in Cairn India (instead of the Rs355 open offer price).
Scenarios
Sesa Goa will hold a minimum of 20% in Cairn India and maximum of
30.4% in Cairn India depending on the success of the open offer (vs 20%
earlier).
Vedanta group (incl Sesa) will own between 51-70.4% stake in Cairn India
post completion of the entire transaction (vs 51-60% earlier).
Depending on the success of the open offer, following scenarios will emerge:
Sesa Goa acquires between 0% and 0.6% in the open offer: In this case, Sesa
Goa will buy between 9.6% and 9.0% from Vedanta/Cairn at Rs405/share,
such that its stake is 20% (including the 10.4% stake acquired from Petronas).
Vedanta will own 31% stake such that Vedanta group will own 51% stake.
Sesa Goa acquires between 0.6% and 9.6% in the open offer: In this case,
Sesa Goa will buy between 9% and 0% from Vedanta/Cairn at Rs405/share,
such that its stake is 20% (including the 10.4% stake acquired from Petronas).
Vedanta will own between 31 and 40% stake such that Vedanta group will
own between 51% and 60% stake.
Sesa Goa acquires 9.6% in the open offer: In this scenario, Sesa Goa will not
buy anything from Vedanta/Cairn and will hold 20%. Vedanta’s will own
40% stake (at Rs405/share) such that Vedanta group will own 60%.
Sesa Goa acquires between 9.6% to 20% in the open offer: In this case, Sesa
Goa will eventually hold between 20% to 30.4% in Cairn India. It will not
buy anything from Vedanta/Cairn. Vedanta will own 40% stake (at
Rs405/share) such that Vedanta group will own between 60%-70.4%
depending on how much Sesa gets in the open offer.
Impact
We analyse the impact on valuations in two extreme scenarios:
If Sesa acquires 20% from open offer (at Rs355/share): Sesa Goa will own
30.4% stake in Cairn India i.e., 10.4% stake acquired at Rs331/share from
Petronas and 20% stake acquired at Rs355/share from the open offer
In this case its average cost for 30.4% stake in Cairn will be Rs347/share
(total investment of US$4.5bn). However, key downside of acquiring more
than 20% stake in Cairn is that Sesa will have to raise further debt to fund the
additional stake. However, it has cash/cash equivalent of Rs86bn as of Dec
2010 (US$1.9bn) and we believe it can raise debt to fund the additional stake.
There is likely to be an upside of Rs23/share to our target price, as we have
factored in a higher average cost of Rs405/share.
If Sesa acquires nothing in the open offer: Sesa will own 20% stake in Cairn
India i.e., 10.4% stake acquired at Rs331/share from Petronas and 9.6% stake
acquired at Rs405/share from Vedanta/Cairn
In this case, Sesa’s average cost will be Rs367/share for 20% stake (total
investment of US$3.1bn). There is likely to be an upside of Rs18/share to
our target price as we have factored in average cost of Rs405/share for
acquiring 20% stake (US$3.5bn).
Valuations – Sesa Goa
We retain Buy on Sesa Goa with a price target of Rs400. We continue to value
Sesa on 4.5x EV/EBITDA (Mar 2013E EBITDA). We value 20% stake in Cairn
India at UBS’s SOTP price target of Rs415/share and apply 20% holdco
discount.
Our bear case valuation for Sesa (assuming a higher royalty of 20% instead of
current 10%) is Rs327/share.
Table 1: Price target derivation
Rs m Revised
EBITDA - March 2013 60,598
Target EV/EBITDA multiple (x) 4.5
Target EV 272,692
Net cash - March 2012 (55,795)
Target Market Cap ex-stake in Cairn India 216,897
Price target for core business (Rs/share) 252
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Price target for Cairn India stake 148
Price target (Rs/share) 401**
Source: UBS estimates **Rounded off to Rs400 *Earlier EBITDA estimate was based on Dec 2012 EBITDA.
Bear Case Valuation
Recent media reports indicated that the government may increase royalty rate
(currently 10% ad valorem) instead of imposing a 26% mining tax profit. If we
assume royalty rate to increase to 20% (instead of 10%), Sesa Goa’s EPS for
FY12/13 would decline to Rs33/32 and price target would decline to Rs327.
Table 2: Price target derivation – Bear Case
Rs m
EBITDA - March 2013 47,838
Target EV/EBITDA multiple (x) 4.5
Target EV 215,269
Net cash - March 2012 (61,636)
Target Market Cap ex-stake in Cairn India 153,632
Price target for core business (Rs/share) 179
Stake in Cairn India 20%
Cairn India shares outstanding (mn) 1,920
Target price of Cairn India (Rs/share) 415
Value of stake in Cairn India 159,352
Less: Holding company discount (20%) 31,870
Target value of stake in Cairn India (Rs/share) 127,481
Price target for Cairn India stake 148
Price target (Rs/share) 327
Source: UBS Estimates
Sesa Goa
Sesa Goa is a 51%-owned subsidiary of the Vedanta Group and was acquired
from Mitsui & Co., in 2007. Sesa is the largest listed Indian exporter of iron ore,
selling 12.3m tonnes in FY08 primarily to steel-making companies in China,
Japan and Europe. Over the past decade, Sesa has diversified into the
manufacture of pig iron and metallurgical coke via its 88.2%-owned subsidiary,
Sesa Industries Ltd.
Statement of Risk
Sesa, like all mining companies, is subject to exchange rate risk, and to price
fluctuations of its main products. Investors should be aware mining stocks
including Sesa are inherently volatile and extremely dependent on global
underlying demand and supplier behaviour. A weakening in global production
could place our pricing forecast, earnings and valuations under pressure.
Investment in Sesa is subject to China risk, given the majority of forecasted iron
ore growth is from China
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