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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily27032012.pdf
Sesa Goa: Fine-tuning fair value post recent developments
` Rating moved to ADD (from REDUCE) for Sesa, unchanged for Sterlite
` Sesa-Sterlite will have scale but with constraints on fungibilty of cash
Rating moved to ADD (from REDUCE) for Sesa, unchanged for Sterlite
We incorporate the impact of recent increase in cess on crude in our fair value for Sesa. Our
energy team reduced Cairn India fair value to Rs330. This reduces Sesa/ Sterlite fair value by Rs22
and Rs14 respectively. This is offset by elimination of holdco discount assigned to stake in HZ post
recent newspaper reports and management statements that it is in advanced talks to buy out
Government stake in HZ. We align our rating to ADD from REDUCE earlier on Sesa post the recent
stock price correction. Sterlite fair value at Rs132 remains unchanged.
Our fair value of Sesa comprises (1) Rs138 assigned to stake in HZ based on 5.5X FY2013E EBITDA,
(2) Rs25 to Zinc International business based on 3.5X FY2013E EBITDA, (3) DCF-based value of
Rs30 for the iron ore business, (4) Rs125 for stake in Cairn India and (5) Rs16 for synergy value
from the restructuring. This is offset by Rs44 negative value assigned to VAL. Sesa trades at 5X
pro-forma consolidated earnings and 4.4X pro-forma attributable EBITDA for FY2013E, attractive
in our view. Our fair value is based on conservative assumptions, as we do not assign value to
power assets and capex on the 325 ktpa smelter at Balco.
Sesa-Sterlite will have scale but with constraints on fungibilty of cash
After restructuring, the size of Sesa Sterlite will be substantial on various parameters such as
enterprise value, EBITDA and scale in verticals. Post-restructuring entities can be clubbed in three
major buckets: (1) cash-rich Hindustan Zinc operations, which had net cash of US$3.2 bn at the
end of December 2011. HZ will likely account for 22-25% of EBITDA and ~35% of Sesa-Sterlite’s
net income, (2) 60% ownership in Cairn India. Cairn India will account for ~35% of EBITDA and
55% of net income of Sesa Sterlite, and (3) Sesa Sterlite operations will have gross debt of
US$13.5 bn in FY2012E. This debt will likely be serviced through US$1.5 bn of EBITDA generation.
EBITDA contribution of ~35% from the rest of the operations will likely go in servicing this debt.
Sesa Sterlite will have to rely on upstreaming of cash from HZ and Cairn to meet debt obligations.
Against this backdrop, buyout of minorities in HZ can be a key catalyst and resolve the challenge
of cash fungibility.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily27032012.pdf
Sesa Goa: Fine-tuning fair value post recent developments
` Rating moved to ADD (from REDUCE) for Sesa, unchanged for Sterlite
` Sesa-Sterlite will have scale but with constraints on fungibilty of cash
Rating moved to ADD (from REDUCE) for Sesa, unchanged for Sterlite
We incorporate the impact of recent increase in cess on crude in our fair value for Sesa. Our
energy team reduced Cairn India fair value to Rs330. This reduces Sesa/ Sterlite fair value by Rs22
and Rs14 respectively. This is offset by elimination of holdco discount assigned to stake in HZ post
recent newspaper reports and management statements that it is in advanced talks to buy out
Government stake in HZ. We align our rating to ADD from REDUCE earlier on Sesa post the recent
stock price correction. Sterlite fair value at Rs132 remains unchanged.
Our fair value of Sesa comprises (1) Rs138 assigned to stake in HZ based on 5.5X FY2013E EBITDA,
(2) Rs25 to Zinc International business based on 3.5X FY2013E EBITDA, (3) DCF-based value of
Rs30 for the iron ore business, (4) Rs125 for stake in Cairn India and (5) Rs16 for synergy value
from the restructuring. This is offset by Rs44 negative value assigned to VAL. Sesa trades at 5X
pro-forma consolidated earnings and 4.4X pro-forma attributable EBITDA for FY2013E, attractive
in our view. Our fair value is based on conservative assumptions, as we do not assign value to
power assets and capex on the 325 ktpa smelter at Balco.
Sesa-Sterlite will have scale but with constraints on fungibilty of cash
After restructuring, the size of Sesa Sterlite will be substantial on various parameters such as
enterprise value, EBITDA and scale in verticals. Post-restructuring entities can be clubbed in three
major buckets: (1) cash-rich Hindustan Zinc operations, which had net cash of US$3.2 bn at the
end of December 2011. HZ will likely account for 22-25% of EBITDA and ~35% of Sesa-Sterlite’s
net income, (2) 60% ownership in Cairn India. Cairn India will account for ~35% of EBITDA and
55% of net income of Sesa Sterlite, and (3) Sesa Sterlite operations will have gross debt of
US$13.5 bn in FY2012E. This debt will likely be serviced through US$1.5 bn of EBITDA generation.
EBITDA contribution of ~35% from the rest of the operations will likely go in servicing this debt.
Sesa Sterlite will have to rely on upstreaming of cash from HZ and Cairn to meet debt obligations.
Against this backdrop, buyout of minorities in HZ can be a key catalyst and resolve the challenge
of cash fungibility.
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