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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight27022012.pdf
SESA GOA
PRICE: RS.227 RECOMMENDATION: REDUCE
TARGET PRICE: RS.197 FY13E P/E 5.8X; EV/EBITDA 8.3X
Proposed Transaction - Sterlite Industries (India) Ltd (together with its
subsidiaries), Sesa Goa Ltd (together with its subsidiaries) and Vedanta
Resources Plc (together with its subsidiaries) have on 25 Feb 2012
announced a recommended merger of Sterlite into Sesa Goa to form Sesa
Sterlite.
Our take on the proposed Sesa Sterlite Transaction
n No reasonable operational synergies are visible to us.
n Mostly financial and taxation (from accumulated losses and unabsorbed
deprecication of $1.2 bn for VAL) synergies are probable. Even that might be
limited to large extent given the cash cows for the Vedanta Group, Hind Zinc
and Cairn India, would continue to operate as separate listed subsidiaries. So
their cash flows would not be clubbed with parent company in such an efficient
manner that it lends considerable saving in financing and tax synergies. Cash
flows from these subsidiaries can flow into to proposed Sesa Sterlite, either by
dividends which would attract considerable dividend distribution tax or by Intragroup cash transfers which might invite scrutiny and probable backlash from the
minority shareholders of publicly listed entities Hind Zinc and Cairn India.
n The transaction will result in merging the considerably high and consistent cash
burning VAL (Vedanta Aluminium Limited), with good cash generating entities to
meet VAL's ongoing funding requirements. Also to be noted is that Sterlite had
ICDs of ~INR 95bn in VAL, on which now interest was getting accrued. With this
transaction, the INR 95bn of ICD would be foregone. Also, the 100% share in
the zero EBIDA earnings and huge losses at PAT level of VAL will come into the
merged entity and would hurt consolidated earnings of Sesa Sterlite. The proposed big deal would hide to a large extent, the transfer of VAL and the related
group cash transfers.
n Sesa Sterlite deal might be a misguided focus at a very inappropriate time as we
believe that the Sterlite/Vedanta Resources board focus at this point should have
been to acquire Indian government stakes in Hind Zinc and Balco before the end
of FY12 i.e. by 31 Mar 2012. It is widely known that Indian government is considerably off target from its FY12 divestment program. So, this might have been
best opportunity to get the stake buyout deal closed before end of FY12, which
has been biting dust for several years on want of lack of agreement between
two parties on valuation.
n We believe government stake buyouts in Hind Zinc and Balco would offer
multifold higher operational and financial synergies than the present proposed
transaction of Sesa Sterlite. So if Sterlite fails to buyout government stakes in
Hind Zinc and Balco within next 35 remaining days of FY12, we would attribute
board focus on the proposed corporate restructuring as the primary reason for
failure and would classify it as a lost opportunity for all its stakeholders.
n One of the probable benefits of the deal can be that Cairn India finances can be
consolidated with the parent Sesa Sterlite (as it would own >51% stake) for accounting purpose and Cairn India contribution would boost Sesa Sterlite EBITDA
and that may attract better street valuation as popularly followed holding company discount based on SOTP valuation would no longer be required. As per our
calculation, ~6% of the Cairn India actual market cap or its fair value estimate
could be quantified as the valuation gain from the proposed deal. However, our
calculation also indicates that Sesa Goa would be paying ~11% premium to acquire Cairn India from Vedanta Resources over its acquisition price for 20.1%
stake in Cairn India which nullifies the earlier stated gain to large extent.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight27022012.pdf
SESA GOA
PRICE: RS.227 RECOMMENDATION: REDUCE
TARGET PRICE: RS.197 FY13E P/E 5.8X; EV/EBITDA 8.3X
Proposed Transaction - Sterlite Industries (India) Ltd (together with its
subsidiaries), Sesa Goa Ltd (together with its subsidiaries) and Vedanta
Resources Plc (together with its subsidiaries) have on 25 Feb 2012
announced a recommended merger of Sterlite into Sesa Goa to form Sesa
Sterlite.
Our take on the proposed Sesa Sterlite Transaction
n No reasonable operational synergies are visible to us.
n Mostly financial and taxation (from accumulated losses and unabsorbed
deprecication of $1.2 bn for VAL) synergies are probable. Even that might be
limited to large extent given the cash cows for the Vedanta Group, Hind Zinc
and Cairn India, would continue to operate as separate listed subsidiaries. So
their cash flows would not be clubbed with parent company in such an efficient
manner that it lends considerable saving in financing and tax synergies. Cash
flows from these subsidiaries can flow into to proposed Sesa Sterlite, either by
dividends which would attract considerable dividend distribution tax or by Intragroup cash transfers which might invite scrutiny and probable backlash from the
minority shareholders of publicly listed entities Hind Zinc and Cairn India.
n The transaction will result in merging the considerably high and consistent cash
burning VAL (Vedanta Aluminium Limited), with good cash generating entities to
meet VAL's ongoing funding requirements. Also to be noted is that Sterlite had
ICDs of ~INR 95bn in VAL, on which now interest was getting accrued. With this
transaction, the INR 95bn of ICD would be foregone. Also, the 100% share in
the zero EBIDA earnings and huge losses at PAT level of VAL will come into the
merged entity and would hurt consolidated earnings of Sesa Sterlite. The proposed big deal would hide to a large extent, the transfer of VAL and the related
group cash transfers.
n Sesa Sterlite deal might be a misguided focus at a very inappropriate time as we
believe that the Sterlite/Vedanta Resources board focus at this point should have
been to acquire Indian government stakes in Hind Zinc and Balco before the end
of FY12 i.e. by 31 Mar 2012. It is widely known that Indian government is considerably off target from its FY12 divestment program. So, this might have been
best opportunity to get the stake buyout deal closed before end of FY12, which
has been biting dust for several years on want of lack of agreement between
two parties on valuation.
n We believe government stake buyouts in Hind Zinc and Balco would offer
multifold higher operational and financial synergies than the present proposed
transaction of Sesa Sterlite. So if Sterlite fails to buyout government stakes in
Hind Zinc and Balco within next 35 remaining days of FY12, we would attribute
board focus on the proposed corporate restructuring as the primary reason for
failure and would classify it as a lost opportunity for all its stakeholders.
n One of the probable benefits of the deal can be that Cairn India finances can be
consolidated with the parent Sesa Sterlite (as it would own >51% stake) for accounting purpose and Cairn India contribution would boost Sesa Sterlite EBITDA
and that may attract better street valuation as popularly followed holding company discount based on SOTP valuation would no longer be required. As per our
calculation, ~6% of the Cairn India actual market cap or its fair value estimate
could be quantified as the valuation gain from the proposed deal. However, our
calculation also indicates that Sesa Goa would be paying ~11% premium to acquire Cairn India from Vedanta Resources over its acquisition price for 20.1%
stake in Cairn India which nullifies the earlier stated gain to large extent.
