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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.
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.