Rating: Sell; Target Price: Rs160; CMP: Rs194; Downside: 17.4%
Subdued performance; start-up of projects further delayed
We maintain Sell on Sesa Sterlite (SSLT) with a target price of Rs160
on account of i) subdued operational performance during Q3 with sharp
cut in volume guidance at HZL and further delays in start-up of new
projects at BALCO & VAL thereby diluting the volume growth potential
and ii) high debt on standalone books with operations not fully
utilised and non-integrated (VAL faces bauxite & alumina shortage, SEL
faces coal linkage and evacuation issues and Sesa's iron ore
operations restart visibility is low). We cut our FY14E/15E EBITDA
estimates by 3.7%/6.2% to factor in lower volumes.
$ Disappointing performance from zinc and power operations:
Operational performance disappointed in zinc with lower volumes
(Lead/silver down by 20%/30% YoY, International zinc volumes at 85kt,
down 18% YoY). Al business was robust with stable volumes and lower
costs (CoP down 12%/18% YoY for BALCO/VAL). Power business remained
subdued on volume front and disappointed on realizations, iron ore
operations remained shut, oil & gas was largely stable while copper
business was robust with highest ever volumes and strong TcRc margins.
$ Operational performance lower than expectations: Consolidated EBITDA
was ~8% lower than our estimates due to lower than expected operating
profits from zinc and power operations. PAT stood at Rs18.7bn (~5%
lower than est.) as other income was lower due to MTM losses, partly
offset by lower taxes due to reversal of provisioning made earlier. We
reduce our FY15E EBITDA estimates by ~6% due to cut in volumes at
VAL/BALCO from new projects, lower merchant power PLF at SEL/BALCO and
lower mined metal output at domestic zinc operations.
$ Unutilized capacities a drag on returns: The group is saddled with
unutilized capacities at VAL (1.25 mtpa smelter remains
non-operational) and BALCO (325ktpa smelter and 1200 MW power plant's
commercial start-up has been repeatedly delayed). We believe the drag
of high debt (~Rs840bn) and CWIP on returns will continue as new
capacities are not integrated and offer low returns potential. There
is as yet no clarity from management on their potential start-up.
$ Valuations and risks - recommend Sell: We arrive at SOTP fair value
of Rs160 for Sesa Sterlite after shifting our valuation base to
Dec'15E and factoring in reduction in our EBITDA estimates due to
further delay in commissioning of projects. We continue to assign 20%
holding company discount to HZL and BALCO as we wait for clarity on
consolidation of holding post buyout of GoI stake. Stake buyout in HZL
and BALCO could lead to an upside of ~Rs30-35/share in our target
price but current valuations suggest that market has already factored
this in, thereby leaving no room for further upside.
Thanks & Regards
��
Subdued performance; start-up of projects further delayed
We maintain Sell on Sesa Sterlite (SSLT) with a target price of Rs160
on account of i) subdued operational performance during Q3 with sharp
cut in volume guidance at HZL and further delays in start-up of new
projects at BALCO & VAL thereby diluting the volume growth potential
and ii) high debt on standalone books with operations not fully
utilised and non-integrated (VAL faces bauxite & alumina shortage, SEL
faces coal linkage and evacuation issues and Sesa's iron ore
operations restart visibility is low). We cut our FY14E/15E EBITDA
estimates by 3.7%/6.2% to factor in lower volumes.
$ Disappointing performance from zinc and power operations:
Operational performance disappointed in zinc with lower volumes
(Lead/silver down by 20%/30% YoY, International zinc volumes at 85kt,
down 18% YoY). Al business was robust with stable volumes and lower
costs (CoP down 12%/18% YoY for BALCO/VAL). Power business remained
subdued on volume front and disappointed on realizations, iron ore
operations remained shut, oil & gas was largely stable while copper
business was robust with highest ever volumes and strong TcRc margins.
$ Operational performance lower than expectations: Consolidated EBITDA
was ~8% lower than our estimates due to lower than expected operating
profits from zinc and power operations. PAT stood at Rs18.7bn (~5%
lower than est.) as other income was lower due to MTM losses, partly
offset by lower taxes due to reversal of provisioning made earlier. We
reduce our FY15E EBITDA estimates by ~6% due to cut in volumes at
VAL/BALCO from new projects, lower merchant power PLF at SEL/BALCO and
lower mined metal output at domestic zinc operations.
$ Unutilized capacities a drag on returns: The group is saddled with
unutilized capacities at VAL (1.25 mtpa smelter remains
non-operational) and BALCO (325ktpa smelter and 1200 MW power plant's
commercial start-up has been repeatedly delayed). We believe the drag
of high debt (~Rs840bn) and CWIP on returns will continue as new
capacities are not integrated and offer low returns potential. There
is as yet no clarity from management on their potential start-up.
$ Valuations and risks - recommend Sell: We arrive at SOTP fair value
of Rs160 for Sesa Sterlite after shifting our valuation base to
Dec'15E and factoring in reduction in our EBITDA estimates due to
further delay in commissioning of projects. We continue to assign 20%
holding company discount to HZL and BALCO as we wait for clarity on
consolidation of holding post buyout of GoI stake. Stake buyout in HZL
and BALCO could lead to an upside of ~Rs30-35/share in our target
price but current valuations suggest that market has already factored
this in, thereby leaving no room for further upside.
Thanks & Regards
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