Sesa-Sterlite seen valued below peers

The proposed merger of Sesa Goa and Sterlite Industries has overcome a major hurdle after a green signal by shareholders of the two companies, but experts say the entity will still be valued lower than its peers and needed to focus on improving the operations. 

 “The overhang of the merger is almost over and the management should now aggressively start pursuing growth plans,” said an analyst with an international brokerage.

He said the biggest concern for the Vedanta group was the outcome of the shareholders’ meeting. Now that shareholders have favoured a merger and only the regulatory and court approvals remain, the company should chalk out further plans at the earliest.

Jagdish Agarwal, Goutam Chakraborty and Prince Poddar, analysts with brokerage Emkay Research in a report published on June 25, said, “Global peers including BHP Billiton, Rio Tinto, and Teck Resources are trading at ~8x 1 year forward earning and ~4.2x 1 year forward EV/ Ebitda. Considering the holding company structure and operational constraints, we believe proposed Sesa-Sterlite to fetch a lower valuation compared to its global peers.”

They said this is the time for the company to start building up on the leaner structure and bring its focus back to operations from internal restructuring, as world over the market has turned very dynamic.

Still the combined entity would be one of the biggest diversified natural resources players in the world.

Experts say it will have a market capitalisation of up to Rs61,400 crore and can leverage this structure for further expansions and increase its valuations.

 “The organisational restructuring would give comfort to the parent Vedanta Resources Plc by having the holding structure simplified and the debt being passed on to the Indian subsidiary,” they said.
The company had earlier claimed that by shifting the debt to the Indian entity, it would see a synergy benefit of Rs1,000 crore annually.

“The new entity is expected to have a fiscal 2013 Ebidta of close to Rs20,900 crore and fiscal 2014 Ebidta of close to Rs22,300 crore,” said Pinakin Parekh, analyst with JP Morgan in a report on June 22.

While the Sesa Goa to Sterlite swap ratio of 5:3 favours Sterlite shareholder more, the shareholders will now be a part of a new entity Sesa-Sterlite, which will be one of the biggest diversified natural resources players in the world.

Another analyst from a domestic brokerage said the approval is a major relief for the company and a motivation that it is moving in the right direction.

“The company had attempted a similar exercise in September 2008 when it was planning to restructure its three commodity businesses of copper, aluminium and iron ore. However, it had to withdraw the proposal after resistance from investors,” he said, adding that the company should now focus on a massive growth strategy.

The Emkay analysts said going forward the major triggers for the group would be mining approvals for Vedanta Aluminium, government stake buyout in Hindustan Zinc and Balco, and the commissioning of its massive iron ore project in Liberia.