Metals and Mining: Sesa - Sterlite Merger - Creating a commodity giant ::Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

To simplify its corporate structure, the Vedanta Group has announced the merger of Sesa Goa and Sterlite Industries in the ratio of 3:5 to create a commodity giant (Sesa Sterlite). The combined entity will also own 58.9% in Cairn India (by transfer of Vedanta’s 38.8% stake in Cairn along with debt of USD 5.9bn) and fully merge VAL and MALCO with itself. Though the merger ratio favours Sterlite shareholders, our negative valuation for VAL lessens this favourable impact. We maintain BUY/SO on Sterlite but reduce target price from INR165 to INR150. However, this does not factor in benefits of potential re-rating from scale, diversification and corporate structure simplification. For Sesa Goa shareholders, we believe that benefits of ownership in higher value zinc business are negated by VAL merger and an unfavourable merger ratio. We maintain HOLD recommendation on Sesa with a reduced target price of INR250 (from INR257).

Valuation drag of VAL, Cairn mitigated by tax set-off

We are ascribing a negative valuation of INR44.6bn for VAL against the positive valuation of INR23bn implied in the restructuring. However, with VAL’s accumulated losses of INR57bn, available tax set-off of ~INR17bn mitigates this drag. Our oil and gas team’s fair valuation of Cairn at INR342/share is also lower than the implied valuation of Cairn at INR396/share which also drags down our valuation for Sterlite.

Scale, simpler structure - key potential positives

Post the merger, the entity would be among the top ten diversified commodity plays with a proforma FY13 EBITDA and PAT of USD5.7bn and USD2.3bn respectively. On proforma basis, the merged entity, at current prices, trades at FY13E EV/EBITDA and P/E of ~3.5x and ~5.7x respectively, which is attractive. We see the possibility of a re-rating based on scale and simpler structure, but at this stage, we do not assume benefits of the same.

Outlook & valuations: Advantage Sterlite; maintain ‘HOLD’ on Sesa

Proforma financials of the combined entity for FY13 and FY14 indicate a 3% EPS cut for both years, led by the interest outgo on the increased debt of USD5.9bn inherited from the Cairn transaction. We maintain our ‘BUY/Sector Outperformer’rating/recommendation on Sterlite with revised target price of INR150 (earlier INR165) and maintain ‘HOLD/Sector Performer’ on Sesa Goa with revised target price of INR 249 (earlier INR 257).  

Metals and Mining: Sesa – Sterlite Merger - Creating a commodity giant; sector update