>STERLITE INDUSTRIES: Restructuring Version 2.0e

Event
■ 2nd Attempt at restructuring: After an aborted attempt in 2008, Sterlite Industries seems to be getting close to attempting another restructuring. Management had highlighted its intent to resolve the equity holding of VAL by March’12. Instead of separate business verticals, this time management appears to be considering merging everything into one holding company, virtually creating a dual listing structure. Based on our scenario analysis, even in a worst case, Sterlite could have 25-30% upside. Maintain Outperform.


Impact
■ Dual listing structure in offing: It is not difficult to see the rationale for this restructuring. Investors have been looking for a simpler structure, while Vedanta has been grappling with the mis-match of cash flows among its various businesses. This means Vedanta is likely looking to merge everything into one holding company, almost mirroring Vedanta PLC, except for perhaps Konkola Copper Mines (where it has a minority partner).


■ Vedanta Aluminium (VAL) – expected structure reduces risk for Sterlite: VAL appears to be the prime trigger of this restructuring exercise as it is lossmaking and has no near term solution. Investors have been concerned that the entire VAL stake would be passed on to Sterlite shareholders. However, under the proposed merger structure, if the liability is not assumed by Vedanta PLC, it will be distributed across all the merged entities.


■ Merger ratios – scenario analysis indicates Sterlite well below worst case: We have assumed 3 scenarios, based on current stock prices, consensus target prices and the worst case for Sterlite. Assuming the market cap of the merged entity remains the same as the current sum of parts market cap of the entities to be merged (at US$19bn, see Figure 12), even under our worst case assumption Sterlite’s implied stock price comes to Rs157.


■ Proforma estimates of the merged co: The merged company would have a consolidated Net Profit of US$2.5bn and trade at around 9.5x PER based on the peer group valuation. This implies market cap of US$24bn as compared to the current sum of parts market cap of US$19bn. Some of this would be driven by reducing the holding company discount as minorities reduce.


Earnings and target price revision
■ No change.


Price catalyst
■ 12-month price target: Rs149.00 based on a Sum of Parts methodology.
■ Catalyst: Clarity on merger ratios, streamlining the holdings


Action and recommendation
■ Maintain Outperform: Given past experience, investors may find it tough to believe that the restructuring would not hurt minority shareholders. But our analysis does indicate undervaluation for Sterlite. In particular we would buy on any dips.


To read the full report: STERLITE INDUSTRIES
RISH TRADER