Sesa Sterlite - Two + two = four, but not always - ElaraCapital

Recommend Reduce; waiting for triggers

We recommend Reduce on Sesa Sterlite (SSLT IN) with a target price of INR179, as we expect no meaningful upside from the current levels. Its key subsidiaries, Hindustan Zinc (HZ IN) and Cairn India (Cairn IN), should outperform the parent at our target price, and, thus, we suggest investors should own them individually rather than through SSLT. The CMP of SSLT factors in EBITDA improvement in FY15. We await the following triggers before turning positive on the stock: 1) buying government stake in HZ, which will remove the holding company discount, 2) reopening of iron ore mines at Goa, and 3) the start-up of coal blocks at Balco, providing visibility to earnings. EBITDA set to increase in all business segments, except oil & gas We expect EBITDA improvement in all of its business units, except oil & gas, primarily due to higher volume across segments as well as a rise in zinc prices and TC/RC margin in copper. We assume iron ore mines at Goa will restart by CY14-end, and the aluminium smelter at Balco to start commercial production from Q3FY15. Its 1,980-MW Talwandi Sabo power plant is expected to start contributing only from FY16. Thus, we expect consolidated EBITDA (ex-Cairn India) to increase by 18% YoY in FY15E.

Net debt/ EBITDA (ex HZ and Cairn India) remains high

We expect SSLT net debt (ex HZ and Cairn India) to remain high at ~INR 800bn in FY16E. FY15E net debt-EBITDA (ex HZ and Cairn India) though is expected to fall from the FY14 levels but remains high at 12x. EBITDA of the remaining businesses will be adequate to cover interest cost in FY15. Thus, balance sheet would remain stretched until the group's other business segments start providing cashflow or the company can access cashflow of HZ and Cairn.

Valuation: Reduce with a TP of INR 179

We have incorporated Cairn India in our financials as it comes under our coverage universe. We value SSLT on a FY15 basis and not on FY16 as risk remains until the start-up of iron ore mines at Goa and new aluminium smelter at Balco, which could drive earnings in FY16. The entire value is derived from its two businesses, namely zinc and oil & gas. Our SOTP value of INR 179 factors in INR 117 of HZ (implying INR 158 for HZ with a CMP of INR 116) and INR 158 of Cairn India (implying INR 418 for Cairn India with a CMP of INR 328). Thus, investors may get more upside in both stocks rather than owning it through SSLT. We expect SSLT to provide meaningful upside only if it manages to buy government's stake in HZ, which will remove the holding company discount and can use its cash. We await this trigger, and hence recommend Reduce.

Source : Equity Bulls

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