Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Event
2nd Attempt at restructuring: After an aborted attempt in 2008, Sterlite
Industries seems to be getting close to attempting another restructuring.
Management had highlighted its intent to resolve the equity holding of VAL by
March’12. Instead of separate business verticals, this time management
appears to be considering merging everything into one holding company,
virtually creating a dual listing structure. Based on our scenario analysis, even
in a worst case, Sterlite could have 25-30% upside. Maintain Outperform.
Impact
Dual listing structure in offing: It is not difficult to see the rationale for this
restructuring. Investors have been looking for a simpler structure, while
Vedanta has been grappling with the mis-match of cash flows among its
various businesses. This means Vedanta is likely looking to merge everything
into one holding company, almost mirroring Vedanta PLC, except for perhaps
Konkola Copper Mines (where it has a minority partner).
Vedanta Aluminium (VAL) – expected structure reduces risk for Sterlite:
VAL appears to be the prime trigger of this restructuring exercise as it is lossmaking
and has no near term solution. Investors have been concerned that
the entire VAL stake would be passed on to Sterlite shareholders. However,
under the proposed merger structure, if the liability is not assumed by
Vedanta PLC, it will be distributed across all the merged entities.
Merger ratios – scenario analysis indicates Sterlite well below worst
case: We have assumed 3 scenarios, based on current stock prices,
consensus target prices and the worst case for Sterlite. Assuming the market
cap of the merged entity remains the same as the current sum of parts market
cap of the entities to be merged (at US$19bn, see Figure 12), even under our
worst case assumption Sterlite’s implied stock price comes to Rs157.
Proforma estimates of the merged co: The merged company would have a
consolidated Net Profit of US$2.5bn and trade at around 9.5x PER based on
the peer group valuation. This implies market cap of US$24bn as compared to
the current sum of parts market cap of US$19bn. Some of this would be
driven by reducing the holding company discount as minorities reduce.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs149.00 based on a Sum of Parts methodology.
Catalyst: Clarity on merger ratios, streamlining the holdings
Action and recommendation
Maintain Outperform: Given past experience, investors may find it tough to
believe that the restructuring would not hurt minority shareholders. But our
analysis does indicate undervaluation for Sterlite. In particular we would buy
on any dips.
3 possible scenarios
We believe that Vedanta is heading for a merger of Sterlite, Sesa, VAL and the holding of Cairn
India into a new entity. Now the key question is around the merger ratios and valuation of VAL etc.
We have built 3 possible scenarios for this merger, assuming different stock prices for Sesa,
Sterlite, VAL and Cairn to see the impact and calculate the implied stock prices of both Sterlite
Industries and Sesa. We have assumed consensus numbers for Sesa and Cairn India while we
have assumed -US$6.5bn (including debt) as NPV for VAL.
CASE 1: In the first scenario, we have assumed current market prices for Sesa and Sterlite and
Rs355/ share for Cairn (Vedanta’s acquisition price) and have taken $4.8bn of negative value for
VAL, which is Vedanta’s share at 70.5% of the total investment (which is based on our NPV
calculations for VAL).
Fig 1 Case 1 : current market price for Sesa and Sterlite and no discount to VAL’s value
Case 1 at market prices Market cap ($bn) % contribution
Sesa at current market price 4.3 33%
Sterlite at current market price 8.2 63%
Vedanta - Cairn + VAL 0.5 4%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs355/share 5.3
VAL's 70.5% with Vedanta -4.8
Total 13
Source: Macquarie Research, February 2012
Having arrived at the proportion of entities being merged as above, we have tried to look at what
the implied share price is. For this we have assumed the current market cap of the entities being
merged, namely Sesa, Sterlite and Cairn India. This comes to US$19bn. We have assumed that
the negative value for VAL is already built into Sterlite’s stock price.
Fig 2 Given these assumptions, Sterlite could see an upside potential of 46% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 354 6.3
Sterlite 175 12.0
Vedanta - Cairn + VAL 0.7
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.49
Source: Macquarie Research, February 2012
CASE 2: In the second scenario, we have assumed (a) the consensus target price for Sesa, (b)
the consensus target price for Sterlite at Rs149/share (c) Rs 405/share for Cairn – the acquisition
price for Vedanta for promoters including the non compete fee and (d) have taken a write off for
Vedanta’s equity investment in VAL.
Fig 3 Case 2 : Street target price for Sesa and Macq target price for Sterlite and discount to VAL’s value
Case 2 at target prices Market cap ($bn) % contribution
Sesa at Street target price of Rs216/share 3.8 24%
Sterlite at our target price of Rs149/share 10.2 64%
Vedanta - Cairn + VAL 2 13%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs405/share 6
VAL's 70.5% write off Vedanta's equity to 0 -4
Total 16
Source: Bloomberg, Macquarie Research, February 2012
Fig 4 Given these assumptions, Sterlite could see an upside potential of 47% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 254 4.5
Sterlite 177 12.1
Vedanta - Cairn + VAL 2.4
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.69
Source: Macquarie Research, February 2012
CASE 3: In the third scenario we have assumed current market prices for Sesa and Sterlite and
Rs 405/share for Cairn – the acquisition price for Vedanta for promoters including the non
compete fee, and have taken a write off for Vedanta’s equity investment in VAL.
Fig 5 Case 3 : current market price for Sesa and Sterlite and discount to VAL’s value
Case 3 at market price and discount to VAL Market cap ($bn) % contribution
Sesa at current market price 4.3 30%
Sterlite at current market price 8.2 57%
Vedanta - Cairn + VAL 2 14%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs405/share 6
VAL's 70.5% write off Vedanta's equity to 0 -4
Total 14.5
Source: Macquarie Research, February 2012
Fig 6 Given these assumptions, Sterlite could see an upside potential of 31% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 317 5.6
Sterlite 157 10.7
Vedanta - Cairn + VAL 2.6
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.49
Source: Macquarie Research, February 2012
EXPECTED MERGER PROPOSAL
Instead of separate business verticals, this time management appears to be considering merging
everything into one holding company, virtually creating a dual listing structure.
Fig 7 Which companies could be merged - and stakeholders involved
Companies to be merged Comments
Sterlite including VAL's 29.5% stake Sterlite's Shareholders
Sesa Goa standalone+20% Cairn Sesa's Shareholders
Cairn 38.5% Vedanta's shareholders
VAL - 70.5% stake Vedanta's shareholders
Source: Macquarie Research , February 2012
Vedanta has been grappling with the issue of mis-match of cash flows among its various
businesses, which means is may look to merge everything into one holding company, almost
mirroring Vedanta PLC, maybe for perhaps Konkola Copper Mines (where it has a minority
partner).
Fig 8 Cash flow mismatch is a big concern for the company, is increasing debt in some businesses and can’t
access cash in others
As of September 2011 Net Debt ($mn)
Sterlite Energy 895
Sterlite Standalone including CMT (135)
Zinc India (3,384)
Anglo Zinc (278)
Balco 592
Sterlite Consolidated (2,258)
VAL 2,810
Sesa Goa 647
Copper Zambia 765
Malco (1)
Vedanta Plc 5,204
Cairn (1,458)
Vedanta Consolidated 5,709
Source: Company Data, Macquarie Research, February 2012
Vedanta Aluminium (VAL) – joker in the pack: VAL appears to be the prime trigger of this
restructuring exercise as it is a loss making unit and has no near term solution. Vedanta PLC,
whose balance sheet has been under stress post the Cairn India acquisition, has been looking to
offload its 70.5% equity here. The question is, who would fund this? Management has maintained
that Sterlite will continue to hold only 30%. Since we are assuming that everything will get merged
into a new entity, it means the VAL burden can’t be loaded onto Sterlite alone; in the worst case, it
will be distributed across the merged entity.
Fig 9 Investments in VAL - contributors
Investments by Sterlite in VAL Rsmn 101,750 34%
Investments by Vedanta Rsmn 36,900 13%
External Rsmn 156,530 53%
Total Rsmn 295,180
Source: Macquarie Research, February 2012
Sesa Goa – to provide the currency to fund VAL: Sesa Goa is trading at low valuations, driven
by the holding company discount for its 20% holding in Cairn India. This holding company discount
would narrow down under the merged entity as the holding in Cairn India would rise to 58.5%.
Proforma estimates of the merged company: The merged company would have a consolidated
Net Profit of US$2.5bn and trade at around 9.5x PER based on peer group valuations.
Fig 10 The consolidated entity – P&L
Revenue- proforma Rsmn 815,013
EBITDA - proforma Rsmn 302,479
Depreciation Rsmn 68,663
EBIT Rsmn 233,816
Interest Rsmn 26,006
Other Income Rsmn 36,355
PBT Rsmn 244,166
Tax Rsmn 49,199
PAT before minority interest Rsmn 194,967
Minority Interest Rsmn 73,762
Proforma PAT Rsmn 121,205
Source: Macquarie Research, February 2012
Fig 11 Diversifieds’ multiples suggests that the consolidated entity should also trade at these multiples
FY13 PER EV/EBITDA
BHP Billiton 9.8 4.9
Rio Tinto 9.4 5.4
Average 9.6 5.2
Source: Macquarie Research, February 2012
This implies a market cap of US$24bn as compared to the current sum of parts market cap of
US$19bn. This gives leeway for some positive valuation for VAL, which should benefit Sterlite.
Fig 12 The current market cap is at $19bn and company can trade at US$24bn
New shares Current shares (mn) Share price (Rs/share) Market cap/ book value
(Rsmn)
Sterlite 3,362 120 430,336
Sesa Goa 870 247 214,629
Cairn – 38.5% stake 1,903 391 286,683
VAL – book value 154,680
Current value of the combined entity 1,086,328
Current value of the combined entity ($bn) 19
Source: Macquarie Research, February 2012, prices as of February 21,2012
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Event
2nd Attempt at restructuring: After an aborted attempt in 2008, Sterlite
Industries seems to be getting close to attempting another restructuring.
Management had highlighted its intent to resolve the equity holding of VAL by
March’12. Instead of separate business verticals, this time management
appears to be considering merging everything into one holding company,
virtually creating a dual listing structure. Based on our scenario analysis, even
in a worst case, Sterlite could have 25-30% upside. Maintain Outperform.
Impact
Dual listing structure in offing: It is not difficult to see the rationale for this
restructuring. Investors have been looking for a simpler structure, while
Vedanta has been grappling with the mis-match of cash flows among its
various businesses. This means Vedanta is likely looking to merge everything
into one holding company, almost mirroring Vedanta PLC, except for perhaps
Konkola Copper Mines (where it has a minority partner).
Vedanta Aluminium (VAL) – expected structure reduces risk for Sterlite:
VAL appears to be the prime trigger of this restructuring exercise as it is lossmaking
and has no near term solution. Investors have been concerned that
the entire VAL stake would be passed on to Sterlite shareholders. However,
under the proposed merger structure, if the liability is not assumed by
Vedanta PLC, it will be distributed across all the merged entities.
Merger ratios – scenario analysis indicates Sterlite well below worst
case: We have assumed 3 scenarios, based on current stock prices,
consensus target prices and the worst case for Sterlite. Assuming the market
cap of the merged entity remains the same as the current sum of parts market
cap of the entities to be merged (at US$19bn, see Figure 12), even under our
worst case assumption Sterlite’s implied stock price comes to Rs157.
Proforma estimates of the merged co: The merged company would have a
consolidated Net Profit of US$2.5bn and trade at around 9.5x PER based on
the peer group valuation. This implies market cap of US$24bn as compared to
the current sum of parts market cap of US$19bn. Some of this would be
driven by reducing the holding company discount as minorities reduce.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs149.00 based on a Sum of Parts methodology.
Catalyst: Clarity on merger ratios, streamlining the holdings
Action and recommendation
Maintain Outperform: Given past experience, investors may find it tough to
believe that the restructuring would not hurt minority shareholders. But our
analysis does indicate undervaluation for Sterlite. In particular we would buy
on any dips.
3 possible scenarios
We believe that Vedanta is heading for a merger of Sterlite, Sesa, VAL and the holding of Cairn
India into a new entity. Now the key question is around the merger ratios and valuation of VAL etc.
We have built 3 possible scenarios for this merger, assuming different stock prices for Sesa,
Sterlite, VAL and Cairn to see the impact and calculate the implied stock prices of both Sterlite
Industries and Sesa. We have assumed consensus numbers for Sesa and Cairn India while we
have assumed -US$6.5bn (including debt) as NPV for VAL.
CASE 1: In the first scenario, we have assumed current market prices for Sesa and Sterlite and
Rs355/ share for Cairn (Vedanta’s acquisition price) and have taken $4.8bn of negative value for
VAL, which is Vedanta’s share at 70.5% of the total investment (which is based on our NPV
calculations for VAL).
Fig 1 Case 1 : current market price for Sesa and Sterlite and no discount to VAL’s value
Case 1 at market prices Market cap ($bn) % contribution
Sesa at current market price 4.3 33%
Sterlite at current market price 8.2 63%
Vedanta - Cairn + VAL 0.5 4%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs355/share 5.3
VAL's 70.5% with Vedanta -4.8
Total 13
Source: Macquarie Research, February 2012
Having arrived at the proportion of entities being merged as above, we have tried to look at what
the implied share price is. For this we have assumed the current market cap of the entities being
merged, namely Sesa, Sterlite and Cairn India. This comes to US$19bn. We have assumed that
the negative value for VAL is already built into Sterlite’s stock price.
Fig 2 Given these assumptions, Sterlite could see an upside potential of 46% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 354 6.3
Sterlite 175 12.0
Vedanta - Cairn + VAL 0.7
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.49
Source: Macquarie Research, February 2012
CASE 2: In the second scenario, we have assumed (a) the consensus target price for Sesa, (b)
the consensus target price for Sterlite at Rs149/share (c) Rs 405/share for Cairn – the acquisition
price for Vedanta for promoters including the non compete fee and (d) have taken a write off for
Vedanta’s equity investment in VAL.
Fig 3 Case 2 : Street target price for Sesa and Macq target price for Sterlite and discount to VAL’s value
Case 2 at target prices Market cap ($bn) % contribution
Sesa at Street target price of Rs216/share 3.8 24%
Sterlite at our target price of Rs149/share 10.2 64%
Vedanta - Cairn + VAL 2 13%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs405/share 6
VAL's 70.5% write off Vedanta's equity to 0 -4
Total 16
Source: Bloomberg, Macquarie Research, February 2012
Fig 4 Given these assumptions, Sterlite could see an upside potential of 47% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 254 4.5
Sterlite 177 12.1
Vedanta - Cairn + VAL 2.4
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.69
Source: Macquarie Research, February 2012
CASE 3: In the third scenario we have assumed current market prices for Sesa and Sterlite and
Rs 405/share for Cairn – the acquisition price for Vedanta for promoters including the non
compete fee, and have taken a write off for Vedanta’s equity investment in VAL.
Fig 5 Case 3 : current market price for Sesa and Sterlite and discount to VAL’s value
Case 3 at market price and discount to VAL Market cap ($bn) % contribution
Sesa at current market price 4.3 30%
Sterlite at current market price 8.2 57%
Vedanta - Cairn + VAL 2 14%
Arrived at from the following assumptions -
Cairn India's 38.5% with Vedanta at Rs405/share 6
VAL's 70.5% write off Vedanta's equity to 0 -4
Total 14.5
Source: Macquarie Research, February 2012
Fig 6 Given these assumptions, Sterlite could see an upside potential of 31% from current levels
Implied share price (Rs/share) Implied market value ($bn)
Sesa 317 5.6
Sterlite 157 10.7
Vedanta - Cairn + VAL 2.6
Sum of the parts valuation (please see figure 12) 19
Ratio of Sesa: Sterlite 0.49
Source: Macquarie Research, February 2012
EXPECTED MERGER PROPOSAL
Instead of separate business verticals, this time management appears to be considering merging
everything into one holding company, virtually creating a dual listing structure.
Fig 7 Which companies could be merged - and stakeholders involved
Companies to be merged Comments
Sterlite including VAL's 29.5% stake Sterlite's Shareholders
Sesa Goa standalone+20% Cairn Sesa's Shareholders
Cairn 38.5% Vedanta's shareholders
VAL - 70.5% stake Vedanta's shareholders
Source: Macquarie Research , February 2012
Vedanta has been grappling with the issue of mis-match of cash flows among its various
businesses, which means is may look to merge everything into one holding company, almost
mirroring Vedanta PLC, maybe for perhaps Konkola Copper Mines (where it has a minority
partner).
Fig 8 Cash flow mismatch is a big concern for the company, is increasing debt in some businesses and can’t
access cash in others
As of September 2011 Net Debt ($mn)
Sterlite Energy 895
Sterlite Standalone including CMT (135)
Zinc India (3,384)
Anglo Zinc (278)
Balco 592
Sterlite Consolidated (2,258)
VAL 2,810
Sesa Goa 647
Copper Zambia 765
Malco (1)
Vedanta Plc 5,204
Cairn (1,458)
Vedanta Consolidated 5,709
Source: Company Data, Macquarie Research, February 2012
Vedanta Aluminium (VAL) – joker in the pack: VAL appears to be the prime trigger of this
restructuring exercise as it is a loss making unit and has no near term solution. Vedanta PLC,
whose balance sheet has been under stress post the Cairn India acquisition, has been looking to
offload its 70.5% equity here. The question is, who would fund this? Management has maintained
that Sterlite will continue to hold only 30%. Since we are assuming that everything will get merged
into a new entity, it means the VAL burden can’t be loaded onto Sterlite alone; in the worst case, it
will be distributed across the merged entity.
Fig 9 Investments in VAL - contributors
Investments by Sterlite in VAL Rsmn 101,750 34%
Investments by Vedanta Rsmn 36,900 13%
External Rsmn 156,530 53%
Total Rsmn 295,180
Source: Macquarie Research, February 2012
Sesa Goa – to provide the currency to fund VAL: Sesa Goa is trading at low valuations, driven
by the holding company discount for its 20% holding in Cairn India. This holding company discount
would narrow down under the merged entity as the holding in Cairn India would rise to 58.5%.
Proforma estimates of the merged company: The merged company would have a consolidated
Net Profit of US$2.5bn and trade at around 9.5x PER based on peer group valuations.
Fig 10 The consolidated entity – P&L
Revenue- proforma Rsmn 815,013
EBITDA - proforma Rsmn 302,479
Depreciation Rsmn 68,663
EBIT Rsmn 233,816
Interest Rsmn 26,006
Other Income Rsmn 36,355
PBT Rsmn 244,166
Tax Rsmn 49,199
PAT before minority interest Rsmn 194,967
Minority Interest Rsmn 73,762
Proforma PAT Rsmn 121,205
Source: Macquarie Research, February 2012
Fig 11 Diversifieds’ multiples suggests that the consolidated entity should also trade at these multiples
FY13 PER EV/EBITDA
BHP Billiton 9.8 4.9
Rio Tinto 9.4 5.4
Average 9.6 5.2
Source: Macquarie Research, February 2012
This implies a market cap of US$24bn as compared to the current sum of parts market cap of
US$19bn. This gives leeway for some positive valuation for VAL, which should benefit Sterlite.
Fig 12 The current market cap is at $19bn and company can trade at US$24bn
New shares Current shares (mn) Share price (Rs/share) Market cap/ book value
(Rsmn)
Sterlite 3,362 120 430,336
Sesa Goa 870 247 214,629
Cairn – 38.5% stake 1,903 391 286,683
VAL – book value 154,680
Current value of the combined entity 1,086,328
Current value of the combined entity ($bn) 19
Source: Macquarie Research, February 2012, prices as of February 21,2012
No comments:
Post a Comment