>STERLITE INDUSTRIES INDIA LIMITED: Potential buyout of Balco – Restructuring opportunity

• News flows stating the Government of India asking Sterlite to submit fresh proposals to buy-back the 49% stake it holds in Balco
• There is a high possibility of the deal getting concluded during FY12 itself as Sterlite has long been pursuing the same and Govt currently expoloring all options of raising money
• Balco’s stake sale would give Govt about Rs 15bn during FY12 itself. Not likely to materia lly impact Sterlite financials.
• Balco buyout could pave the way HZL divestment giving Govt over Rs 150 at current valuations and Sterlite access to complete control over all subsidiaries

What would the buyout entail?

• This would give the Govt anywhere around Rs 15bn and Sterlite complete control over Balco. This would not have any material impact on Sterlite’s financials.
• There are presently three Govt nominees on the Balco Board. Buyout would realign the it’s composition and give Sterlite and Vedanta Resources (parent co of Sterlite) an edge to restructure their aluminium and power businesses.
• Sterlite also has 30% stake in Vedanta Aluminium (Balance 70% held by Vedanta) and the deal could bring about synergy between Balco & Vedanta Aluminium operations
• Further this could also pave the way for buyout of the Govt’s 29.5% stake in HZL. (HZL has Market capitalization of 520bn, Sterlite holds 65% of it)

Valuation
Balco currently operates 245 ktpa of Aluminum, 810 MW of captive power. It is also in the process of commissioning 1200 MW (300 X4) of power and 325ktpa of smelter.
At current capacity Balco generates EBITDA of about Rs 10 bn per annum. Giving a multiple of 5X and adjusting for net debt of Rs 22bn as of 31st March 2011 the current equity value of Balco comes at Rs 28bn


We currently have a target price of Rs 162 for Sterlite. The contribution on account of Balco’s 51% stake is just Rs 4 (Valuation in Sterlite essentially comes from HZL, Zinc overseas operations, Sterlite Copper operations in India & Sterlite Power) We believe the buyout would address the uncertainties surrounding this aspect, fetch the government much needed revenue and give Sterlite and edge to bring about further synergies across its different operations.




Background
Balco an unlisted aluminium company is held 51% by Sterlite & the balance 49% is held by the Government of India. This 51% stake was taken over by Sterlite in March 2001 for a sum of Rs 5.51bn, in the Government of India’s divestment program. The agreement then was that the remaining stake would be sold to Sterlite through call options after three years. The operational performance of Balco improved significantly on account of debottlenecking and expansion activities taken subsequently. Further the improvement in LME prices also gave strength to Balco’s financials.


However the Government of India later backed out saying the agreed price was too low; pushing the issue into arbitration. The arbitration issue lingered on for several years without both the parties reaching a consensus. The Chairman of Sterlite had earlier during July 2011 written to the Prime Minister Office seeking their intervention. The Empowered Group of Ministers (Finance, Law, Mines & heavy Industries) had shared during late Nov 2011 that “status quo” will be maintained. However recently, there has been fresh news report stating Government has sought fresh proposal on Balco buyout from Sterlite.

RISH TRADER