Sesa & Sterlite - Q3FY13 Combined Result Update - Centrum

Sesa Goa & Sterlite Industries

	Sesa Goa	Sterlite Ind.
	Reduce	Reduce
Target Price:	Rs175	Rs105
CMP:	Rs183.4	Rs113.2
Downside:	4.6%	7.2%

Operational performance weak, valuation and debt concerns remain 

For the proposed Sesa Sterlite group (expected to be in place by FY13E end), operational performance surprised negatively across assets with i) lower earnings from domestic zinc operations on the back of higher custom volumes share in lead & silver and lower overall zinc volumes ii) lower QoQ (down ~19%) volumes from merchant power division at SEL due to evacuation constraints, iii) higher losses at VAL despite stable cost performance iv) lower earnings from copper and aluminium operations on account of cost pressures and v) Sesa Goa mining operations remaining completely shut with low visibility of restart in the near future.  Positive developments were mainly from higher profitability at zinc international operations, announcement of mining expansion to 1.2 mtpa of mined metal at domestic zinc operations and greater visibility on WCL iron ore assets in Liberia. 
We were negatively surprised by the low visibility in volumes increase from the 2400 MW power division (SEL) due to evacuation constraints and suspension of factory license for BALCO’s 1200 MW CPP, delay in 325ktpa smelter commissioning and also the slow progress for its captive coal block. We remain concerned on timelines of restart of iron ore operations and long term volumes and profitability of VAL (which operates without captive assets in bauxite and alumina and will become the 100% subsidiary of the merged entity).  We continue to see the merger offering limited benefits to the consolidated entity on account of its huge debt and skewed EBITDA profile (~70% of FY14E group EBITDA will come from HZL and Cairn whose cash fungibility does not exist with the group) and see HZL stake buyout as a key event as well as requirement for the entity to have better cash flow and stable operations.

We have used FY14E EV/EBITDA valuation (see table below) to arrive at a SOTP fair value of Rs175 for Sesa Sterlite and corresponding fair value of Rs105 for Sterlite (based on 0.6x Sesa Sterlite value).  We downgrade our rating to Reduce from Neutral on both the stocks. Possible stake buyout in HZL and BALCO by the group from the GoI could lead to material upgrades in our target prices. The result update details for both Sesa Goa and Sterlite industries with detailed financials and revised estimates are shown on the next few pages.

Thanks & Regards, 

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