Sesa Goa & Sterlite Industries - Operational performance improves, valuation and debt concerns remain - Centrum

For the proposed Sesa Sterlite group (expected to be in place soon), operational performance surprised positively across assets with i) higher earnings from domestic zinc operations on the back of higher surplus concentrate zinc sales of 61kt and increase in integrated metal volumes, ii) higher volumes (up ~31% QoQ) from merchant power division at SEL with low CoP of Rs1.76/unit(down ~22% QoQ), iii) stable cost performance from VAL and iv) higher earnings from copper and aluminium operations on account of better premiums. Positive developments were mainly from easing of evacuation constraints and better coal availability at power operations, guidance of 15% YoY growth in mined metal output at HZL and visibility on restart of iron ore operations of Sesa Goa after positive order from the Supreme Court.

We were negatively surprised by furtherdelay in 325ktpa smelter commissioning at BALCO along with delay in receiving factory license for operational startup of 1200 MW power plant. We remain concerned on 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) and continuation of funding for VAL's losses from standalone operations. Increase in consolidated debt for Sterlite during FY13 remained a drag on the balance sheet. 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 group EBITDA comes 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 the requirement for the entity to have better cash flow and stable operations.

We have used FY15E EV/EBITDA valuation to arrive at a SOTP fair value of Rs180 for Sesa Sterlite and corresponding fair value of Rs108 for Sterlite (based on 0.6x Sesa Sterlite value). We upgrade our rating to Accumulate from Reduce 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.

Source : Equity Bulls

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