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Sterlite versus Vedanta
A key question from investors is STLT v/s VED: which one to buy? We
compare the companies on a variety of metrics. VED has family ownership
alignment and both STLT and VED management LTIPs are geared to
Vedanta’s total shareholder return. VED is more diversified in terms of
EBITDA split now and going forward, meaning it is less geared to
commodity price movements. It is also significantly cheaper than STLT
(and has been consistently for a number of years) and has conducted no
equity capital raises since listing.
So why not own VED? Despite all this, Vedanta has a number of issues
which investors do not like. These include (i) more complex corporate
structure, (ii) ever-increasing value leakage to minorities, (iii) much higher
leverage – e.g. VED net debt is about to go through the roof with the
proposed Cairn deal while STLT has net cash, and (iv) greater
regulatory/government interference risk. In addition STLT is delivering
significantly more organic growth over the next 5yrs (+140% in copper eq
terms vs 101% for VED, though this excludes Cairn and VAL expansion).
Why look at STLT: In the Indian Mining universe, STLT offers best-inclass volume growth (primarily in zinc and power). Importantly the choice
between STLT v/s VED in our view is likely to be more driven by the
investor’s appetite for oil (CAIRN), iron (SESA) and mined copper
exposure which are available in VED and not in STLT (which currently is
mainly geared to zinc and power). How management resolves the asset
overlap in aluminum/power between VED and STLT (right now in the
aluminum v/s power choice, aluminum is more profitable and hence there is
the question of transfer pricing of power on any aluminum smelter starts)
remains difficult to call: while we see plenty of logic in folding VAL into
STLT, any resolution will require minority shareholder approval.
Share price performance likely to diverge due to Cairn: over the last 5yrs
the stocks have performed essentially in line with each other. However, we
feel this is unlikely to continue. In particular we expect the proposed
acquisition of Cairn should be a significant driver in VED’s favour with the
additional diversification, margin enhancement and cashflow generation that
upstream oil exposure will bring, not to mention earnings accretion giving
another leg of valuation support. That said, unfavourable resolution of the
royalty issue could result in substantial NPV dilution for VED, albeit still
leaving it at a discount.
Peer group valuations: On valuations, compared to the Indian/Asian
mining peer group, STLT’s discount to its peer group (Indian MM universe)
is smaller compared to Vedanta’s discount to its peer group. Vedanta
commands a significant discount, a situation which has prevailed
consistently with the exception of 1H-09. STLT which had significantly
underperformed non-ferrous peers in India in 2010 (under performed HNDL
by ~67% and NIFTY by ~32%) has seen some of this reverse YTD (e.g.
+16% v/s HNDL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite versus Vedanta
A key question from investors is STLT v/s VED: which one to buy? We
compare the companies on a variety of metrics. VED has family ownership
alignment and both STLT and VED management LTIPs are geared to
Vedanta’s total shareholder return. VED is more diversified in terms of
EBITDA split now and going forward, meaning it is less geared to
commodity price movements. It is also significantly cheaper than STLT
(and has been consistently for a number of years) and has conducted no
equity capital raises since listing.
So why not own VED? Despite all this, Vedanta has a number of issues
which investors do not like. These include (i) more complex corporate
structure, (ii) ever-increasing value leakage to minorities, (iii) much higher
leverage – e.g. VED net debt is about to go through the roof with the
proposed Cairn deal while STLT has net cash, and (iv) greater
regulatory/government interference risk. In addition STLT is delivering
significantly more organic growth over the next 5yrs (+140% in copper eq
terms vs 101% for VED, though this excludes Cairn and VAL expansion).
Why look at STLT: In the Indian Mining universe, STLT offers best-inclass volume growth (primarily in zinc and power). Importantly the choice
between STLT v/s VED in our view is likely to be more driven by the
investor’s appetite for oil (CAIRN), iron (SESA) and mined copper
exposure which are available in VED and not in STLT (which currently is
mainly geared to zinc and power). How management resolves the asset
overlap in aluminum/power between VED and STLT (right now in the
aluminum v/s power choice, aluminum is more profitable and hence there is
the question of transfer pricing of power on any aluminum smelter starts)
remains difficult to call: while we see plenty of logic in folding VAL into
STLT, any resolution will require minority shareholder approval.
Share price performance likely to diverge due to Cairn: over the last 5yrs
the stocks have performed essentially in line with each other. However, we
feel this is unlikely to continue. In particular we expect the proposed
acquisition of Cairn should be a significant driver in VED’s favour with the
additional diversification, margin enhancement and cashflow generation that
upstream oil exposure will bring, not to mention earnings accretion giving
another leg of valuation support. That said, unfavourable resolution of the
royalty issue could result in substantial NPV dilution for VED, albeit still
leaving it at a discount.
Peer group valuations: On valuations, compared to the Indian/Asian
mining peer group, STLT’s discount to its peer group (Indian MM universe)
is smaller compared to Vedanta’s discount to its peer group. Vedanta
commands a significant discount, a situation which has prevailed
consistently with the exception of 1H-09. STLT which had significantly
underperformed non-ferrous peers in India in 2010 (under performed HNDL
by ~67% and NIFTY by ~32%) has seen some of this reverse YTD (e.g.
+16% v/s HNDL).
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