Monday, April 30, 2012

>SESA GOA: Sesa –Sterlite Merger Update

Sesa –Sterlite Merger Update During the quarter, the Company announced the Scheme of Amalgamation and Arrangement amongst Sterlite Industries (India) Limited, The Madras Aluminum Company Limited, Sterlite Energy Limited, Vedanta Aluminium Limited. After merger the company name will be changed from Sesa Goa Limited to Sesa Sterlite Limited.In this regards,the Company received the approval of the stock exchanges where its shares are listed, and the Competition Commission of India. The application of the Company before the Foreign Investment Promotion Board is pending consideration. The Company has also filed the schemes for the approval of the relevant courts and to seek their directions for convening the meetings of its shareholders and creditors, as may be necessary under the applicable laws.

Revenue growth declined, better than our estimate: During the quarter, revenue of the company degrew by 23% Y-o-Y to `27943mn in Q4FY’12 (our estimate `19730mn) compared to `36236mn in Q4FY’12 on the back of lower volume growth due to ban in Karnataka mining and mining lease expiration in Orissa. 

Volume production continued to be hurt on the back of mining activity: During the Q, production of saleable iron ore fell by 11%Y-o-Y to 4.9mn ton compared to 5.5mn ton of corresponding quarter of previous year where full sales contribution came from Goa. However, total saleable iron ore production declined by 4%Y-o-Y to 4.9mn ton in Q4FY12 compared to 5.1mn ton in Q4FY11. Total sales declined by 21%Y-o-Y to 5.2mn ton in Q4FY12 compared to 6.6mn ton in Q4FY11. Out of total sales, volume sales declined by 17%Y-o-Y to 4.9mn ton from Goa, 60%Y-o-Y fell at 0.2mn ton from Karnataka. 

Higher expenditure impacted operational efficiency; EBITDA declined by 26%: Total expenditure of the company grew by 19%Y-o-Y as a percentage of sales to `17974mn (our estimate `9058mn) in Q4FY’12 compared to `15052mn in Q4FY’11 out of which raw material cost, O&M expenses, employee cost and S&D cost increased by 9%, ~25%, ~32 and 61% respectively during the Q4.. Hence EBITDA declined by 52%Y-o-Y to `9969mn (our estimate `10671mn) in Q4FY12 compared to `21183mn in Q4FY’11. PAT also fell more than expected by ~52% Y-o-Y to `6963mn (our expectation `8648mn) compared to `14617mn in Q4FY11. 

Margins too remain subdued: EBITDAM fell by 3897bps to 35.6% (our estimate 54%) in Q4FY’12 compared to 58.4% in Q4FY’11. PBDTM and PBTM fell by 3344bps and 3740bps to 39.7% and 38.6% respectively on the back of higher total cost. PATM too declined to 24.9% (our estimate 42.9%) in Q4FY’12 compared to 40.3% in Q4FY’11. 

Outlook & Valuation: We value the company based on SOTP valuing based on conservative approach) its core operations on a FY13 EV/EBITDA multiple of 3x (earlier 4x) at `127 and b) Cairn Investment based on market cap (discounted at 25%) at `113. At our revised valuation our target price is maintained at `212/share (adjusted Debt), the stock offers a potential upside of around ~15% from the current level; we recommend ‘Buy’ rating on the stock.

To read report in detail: SESA GOA