>STERLITE INDUSTRIES LIMITED (MORGAN STANLEY)

Media Reports of Balco Stake Purchase – A Positive Step If True

Quick Comment – Impact on our views: We remain Overweight on Sterlite due to its strong volume growth prospects, higher chances on balance stake purchases in HZL and Balco, and likelihood of higher valuations as we come close to the commissioning of its power plant.

What's new: According to the Economic Times, the Government is seeking Rs20bn from Sterlite to exit the balance of the 49% stake it owns in Balco, although this has not been confirmed.

Stake Purchase is value accretive in our view: As per our estimates, the 49% stake in Balco is worth Rs63bn. If this news is accurate, it can add about Rs61/share (about 9% of current stock price) to Sterlite's stock price just due to the gap in valuations of the 49% stake. Value of the option to monetize the mines and infrastructure further after buying out the stake could be bigger, though difficult to quantify now.

We also note here that as per the initial agreement, Sterlite was to pay Rs10.9bn for this stake. But when Sterlite tried to exercise the call option to buy the remaining stake, differences cropped up over the valuation of the company. Nevertheless, we feel the stake purchase of Balco, even at Rs20bn, would be a positive development for Sterlite.

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