Re: {LONGTERMINVESTORS} Sesa Sterlite - Discussion Thread

[Rajesh Desai]

Sesa Goa - NB

·         Sesa Goa’s (SGL) 4QFY13 performance, although in line with expectations, was very subdued because of the iron ore mining ban in Goa and Karnataka.

·         Although, the Supreme Court lifted the ban in Karnataka recently, SGL’s mining lease, including the forest clearance, expired in October 2012.

·         We are negatively surprised to observe the slow progress in Goa considering the state’s high dependence on iron ore mining, as the initial date for hearing by the apex court is yet to be fixed.

·         On a positive note, SGL reiterated its guidance on first iron ore shipment from Liberia by the end of FY14.

·         Currently, we have retained our Buy rating on SGL with a target price of Rs191. We will review our earnings estimates and stock rating post conference call

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CA. Rajesh Desai

[Rajesh Desai]

Sterlite Industries ( NB Insti)

·         The results were well above expectation with revenue being 11%/15% higher than our/consensus estimates. EBITDA was 11%/23% above our/consensus estimates, while PAT was 29%/34% above our/consensus estimates.

·         Higher revenue is primarily driven by strong sales in copper segment, while strong EBITDA performance is driven by strong improvement in copper and power segment. We are positively surprised at the costs reduced in power segment from Rs2.29/unit in 3QFY13 to Rs1.81/unit in 4QFY13. Copper segment performance improvement was driven by higher Tc/Rc margins, which improved from US¢12.4/lb to US¢14.8/lb sequentially.

·         PAT performance was also boosted by lower depreciation, forex gain of Rs779mn and lower tax rate at 12.5% compared to 15.1% in 3QFY13.

·         Overall the company reported 22% YoY and 42% QoQ jump in EBITDA at Rs33,067mn, while PAT was up 47% YoY and 46% QoQ to Rs19,246mn.

·         We will release the detail note post conference call scheduled today

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CA. Rajesh Desai

[Rajesh Desai]

Sterlite Industries (NB Insti)

·         Sterlite Industries (India)’s  (SIIL) 4QFY13 results were above expectations with EBITDA being 11%/23% above our/street estimates, respectively, driven by strong improvement in copper and power generation segments. PAT was 29%/34% above our/consensus estimates, respectively, boosted by lower depreciation, forex gain and a lower tax rate of 12.5% versus 15.1% in 3QFY13.

·          However, the positive surprise on the costs front, driven by higher availability of linkage coal and also better quality of coal, witnessed in power generation and aluminium segments is unlikely to sustain in the coming quarters.

·         We have cut our revenue/EBITDA estimates by 7%/10%, respectively, for FY14E driven by the closure order for copper smelter and deferment of new power and aluminium units. However, it also resulted in lower depreciation and interest costs and hence our PAT remains flat despite lower EBITDA.

·         We have also revised our EBITDA/PAT estimates downward for the combined entity i.e. Sesa-Sterlite by 8%/3%, respectively, for FY14E.

·         We have downgraded our rating on SIIL to Hold from Buy with a revised target price of Rs106 (9% down from earlier TP of Rs115) based on the valuation of Sesa-Sterlite.

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CA. Rajesh Desai

[Rajesh Desai]

Sterlite Industries (NB Insti)

• Sterlite Industries (India)’s (SIIL) 1QFY14 results were in line with expectations, with EBITDA being 4% below our estimate, but 3% above consensus estimate. PAT was 3% above our estimate, driven by higher other income, but it was 6% below street estimate due to forex loss.
• Revenue remained 15%/13% above our/ street estimates, respectively, due to higher sales in the copper segment, which includes trading revenue as well.  We have cut our EBITDA estimates downward by 4%/2% for FY14/FY15, respectively, following lower profitability in copper and aluminium segments. This resulted in 14%/7% cut in our PAT estimates, respectively, for the same period.
• We have also revised our estimates for Sesa-Sterlite (combined entity) after a sharp increase in Cairn India (CIL) estimates due to a change in our rupee-US dollar rate assumption.
• Our EBITDA estimates have been revised upward by 7%/8% for FY14/FY15, respectively, while PAT estimates have been revised downward by 6%/4%, respectively, due to slippage at SIIL, for the same period.
• We have retained our Buy rating on SIIL with a revised TP of Rs100 (down 6% from our earlier TP of Rs106) following lower earnings of Sesa-Sterlite (barring CIL). Despite increase in earnings, CIL’s TP has not been revised upwards due to net asset value-based valuation methodology.

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CA. Rajesh Desai

[Rajesh Desai]

Sesa Sterlite: Hindustan Zinc cash pile a bonus in proposed Govt stake buy

A buyout of the residual government stake in Hindustan Zinc by the combined entity — Sesa Sterlite — will be a catalyst that will define the next level of growth for the entity. 

The deal, if it is concluded, will provide Sesa Sterlite unrestricted access to the current and future cash pile of Hindustan Zinc, which it can dip into to meet its debt obligations as well as fund future growth. 

Sterlite controls 64.5% of the equity in Hindustan Zinc, which after the merger will be held by the combined entity — Sesa Sterlite. And the government has a 29.5% stake, with the rest being held by public. 

The Sesa Sterlite merger will become effective from Tuesday. Once the government offloads its stake in Hindustan Zinc, close to Rs 22,000 crore worth of cash and equivalents with Hindustan Zinc will become fungible for Sesa Sterlite. Besides, Sesa Sterlite will also have access to future cash flows of Hindustan Zinc. 

Analysts expect Hindustan Zinc to generate an average annual operational cash flow of close to Rs 5,000 crore for the next couple of years. In FY13, the cash flow was Rs 4,752 crore. 

Access to such a large cash hoard will benefit Sesa Sterlite substantially, as the combined debt (excluding subsidiaries and holding companies such as Hindustan Zinc, Cairn India, BALCO and a few more) is significantly high and when earnings also have declined sharply due to the ban on mining, especially in Goa. Sesa Sterlite together have a consolidated net debt (excluding Hindustan Zinc) of close to Rs 48,000 crore, of which around Rs 6,200 crore is maturing this fiscal and Rs 8,000 crore next year. 

Consolidating EBIDTA (excluding Hindustan Zinc) for FY13 was only Rs 5,800 crore. The cash from Hindustan Zinc will address this concern, benefiting Sesa Sterlite investors. So, what is in this for Hindustan Zinc investors? If the government holding of 29.5% is bought out by the Vedanta group, it will have to delist the company as the group holding after the buyout will rise to 94% or it will have to increase the free float by 25%, which appears less likely. 

If the delisting does not take place or is delayed, investors will benefit from the higher dividend that is bound to be paid to meet the cash requirement of Sesa Sterlite. Although, there is still some uncertainty on whether the Vedanta Group will acquire the government's stake, the market is betting on this, which is evident from the way in which the stocks of group firms have run up. 

Sesa Goa has gained 28% in the last one month, Sterlite by 18% & Hindustan Zinc 13%. Reports have indicated that the Attorney General of India has given his view that the government can offload its stake in Hindustan Zinc (29.5%) and Balco (49%) as these firms have ceased being government companies and there was no need to hold onto residual stakes. The value of the government's stake in Hindustan Zinc is Rs 15,000 crore and given the current market scenario, off-loading this stake may be difficult without the participation of Sesa Sterlite. 

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CA. Rajesh Desai

[Rajesh Desai]

Hindustan Zinc cash crucial for Sesa Sterlite to repay loans

Sesa Sterlite facing double whammy of high dollar debt, no progress of alumunium project

For the Vedanta group, the acquisition of Hindustan Zinc stake from Indian Government is extremely important as it will give the Anil Agarwal company the access to HZL’s cash reserves to pay for the loans taken to acquire Cairn India.

With its Lanjigarh alumina project now showing no signs of a revival due to lack of bauxite, HZL is turning out to be the key company for Vedanta’s India operations.  Post its restructuring of India operations under the newly merged entity of Sesa Sterlite, analysts say the new company is getting a mix of good companies with high return, high cash flow oil and gas division  and weak ones like high debt Vedanta Aluminium.

But with the Goa and Karnataka mining issue expected to be sorted out in the next three months, the cash flow of Sesa Sterlite will improve.  A reduction of export tax for iron ore will help the company to improve its cash flow.

According to Morgan Stanley, Sesa-Sterlite’s Indian zinc assets are amongst global cost leaders and growing at a robust pace. “We forecast compounded annual growth of about 7% in fiscal 2013-15 for volumes of total mined metal. The division will also gain from a depreciated rupee. Zinc will continue

to be amongst the cash cows for Sesa-Sterlite, and will be

amongst the highest contributors to Sesa-Sterlite’s good return

ratios,” says a Morgan Stanley analyst.

Sesa Sterlite had acquired the loan from Vedanta worth $5.9 billion and it will have access to Rs 13,000 crore from Cairn India’s balance sheet to repay loans. But this will not be enough and it wants access to HZL's cash reserves -- a company which turned around under Vedanta's manegement. As the government is still holding 29.5% stake in HZL, the group is unable to access the Rs 21,000 crore of cash and investments.                                                

Bankers say after buying Government’s stake, Sese Sterlite will be able to dip into the cash reserves of HZL to help it repay Cairn loans as almost $3.5 billion of loans are coming up for repayment in the next 3 years. A merger between HZL and  Sesa Sterlite will be initiated by the first quarter of next financial year, bankers say,

What is worrying analysts that the prospects of its three large projects under Vedanta Aluminium -- the $2.92 billion aluminum smelter, $1.57 billion  alumina refinery, and $ 0.15 billion debottlenecking  project remain bleak primarily due to unavailability of bauxite.

While the company has made efforts to secure alternate sources of bauxite by acquiring 24.5% stake in L&T’s Raykal Aluminum that holds certain prospecting licenses for bauxite, analysts say they will not be surprised if the company  decides to write down some part of these assets in the next 1-2 years.

As per the company, $3.37 billion has already  been spent on these projects till March this year. With the Niyamgiri hill bauxite mines now out of bounds, the company has asked the Orissa government to arrange for bauxite mine.  If the bauxite issue is not sorted out soon, it will financially impact the new merged entity negatively.

Another important factor analyst says about 60% or about $8 billion of Sesa-Sterlite’s loans are in US currency.  For every 5% depreciation in rupee increase the long term liability of Sesa Sterlite by about $400 million.

But the good news is that Zinc and aluminum prices in India are set on the basis of import party, and hence can gain from rupee depreciation.  In addition, almost 35% of sales volumes are sold in the export market, thus having a favorable impact on the Sesa Sterlite.

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CA. Rajesh Desai