Sesa Goa & Sterlite Industries
Sesa goa
|
Sterlite
| |
Neutral
|
Accumulate
| |
Target Price:
|
Rs178
|
Rs107
|
CMP:
|
Rs170
|
Rs98.5
|
Upside:
|
4.8%
|
8.6%
|
Goa mining shutdown, lower iron ore and LME base metal prices weigh on Sesa Sterlite group; but valuations could turn attractive if HZL stake buyout is successful
The recent negative developments in Sesa Sterlite group are expected to have an adverse impact on the group’s earnings and valuation. We note the developments below and revise our estimates lower. We have revised our EBITDA estimates lower by 6.4%/0.7% for FY13E/14E for Sterlite while our EBITDA estimates for Sesa have been revised lower by 37.8%/28.8% for FY13E/14E. We lower our Sesa Sterlite group fair value target price to Rs178 (and on Sterlite to Rs107 based on 0.6x merger swap ratio) and see downside protected from current levels for the group. We also view the renewed zeal of Vedanta to buy out the residual stake of HZL and BALCO as a key positive trigger for the group.
Recent Negative developments for Sesa Sterlite Group
m Goa government announced a shutdown of all mines in Goa in the wake of illegal mining issue for a complete review of all statutory approvals & documents (expected to take 2-3 months). We see adverse volume impact of ~4 MT for FY13E due to the shutdown for next 2-3 months.
m Iron ore prices have also crashed globally in the last 8-10 weeks (down ~35-40% from recent peak of US$145-150/t) leading to even lower profitability outlook for Sesa on a standalone basis.
m LME base metal prices have remained largely subdued (barring an up move in the last week on positive announcements from ECB and China) which is expected to have a negative impact on the profitability of Sterlite and Sesa Sterlite group.
m VAL has announced shutdown of its alumina refinery from Dec’12 on account of shortage of bauxite.
Recent positive developments for Sesa Sterlite Group
m Vedanta has taken shareholders’ approval for raising the offer price for stake buyout in HZL and BALCO and is also in advanced talks with the government. This could be a long term positive for the Sesa Sterlite group on account of huge free cash flow generation capability of HZL along with its sustainable mine life and huge cash balance effectively funding the buyout transaction indirectly. Also, the stake buyouts would remove the holding company discounts from group valuations and also improve cash fungibility of the whole group.
m Positive macro announcements from ECB and China for supporting their respective economies which could provide short term relief to prices and possible long term improvement in global macro situation.
m Goa government announced a shutdown of all mines in Goa in the wake of illegal mining issue for a complete review of all statutory approvals & documents (expected to take 2-3 months). We see adverse volume impact of ~4 MT for FY13E due to the shutdown for next 2-3 months.
m Iron ore prices have also crashed globally in the last 8-10 weeks (down ~35-40% from recent peak of US$145-150/t) leading to even lower profitability outlook for Sesa on a standalone basis.
m LME base metal prices have remained largely subdued (barring an up move in the last week on positive announcements from ECB and China) which is expected to have a negative impact on the profitability of Sterlite and Sesa Sterlite group.
m VAL has announced shutdown of its alumina refinery from Dec’12 on account of shortage of bauxite.
Recent positive developments for Sesa Sterlite Group
m Vedanta has taken shareholders’ approval for raising the offer price for stake buyout in HZL and BALCO and is also in advanced talks with the government. This could be a long term positive for the Sesa Sterlite group on account of huge free cash flow generation capability of HZL along with its sustainable mine life and huge cash balance effectively funding the buyout transaction indirectly. Also, the stake buyouts would remove the holding company discounts from group valuations and also improve cash fungibility of the whole group.
m Positive macro announcements from ECB and China for supporting their respective economies which could provide short term relief to prices and possible long term improvement in global macro situation.
Revised Estimates and Valuations – negatives factored in, downside protected and positive triggers pending: We revise our estimates for Sesa Goa and Sterlite lower keeping in mind the recent negative developments on volumes, prices and macro situation globally. We have revised our EBITDA estimates lower by 6.4%/0.7% for FY13E/14E for Sterlite while our EBITDA estimates for Sesa have been revised lower by 37.8%/28.8% for FY13E/14E. We lower our Sesa Sterlite group fair value target price to Rs178 but see downside protected from current levels. We continue to value Sterlite at its merger swap ratio of 0.6x Sesa Sterlite group and assign a target price of Rs107 to it. We see the group value increasing by Rs20-25 (and Sterlite value increasing by Rs12-15) on the successful completion of stake buyouts in HZL and BALCO depending upon the price of purchase and see this as a key trigger for the stock. Possible improvement in global macro leading to higher LME and iron ore prices and early restart of iron ore mining in Goa and Karnataka remain the other key triggers for the group. We remain neutral on Sesa goa stock with a positive bias and maintain buy on Sterlite Inds.
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