>“Sesa Goa – Sterlite” Merger

Shareholder approval received – Major milestone

• Vedanta Resources Plc, Sesa Goa and Sterlite Industries shareholders give approval in their EGMs to the organization restructuring plan
• Sterlite to merge with Sesa Goa (5:3 ratio); Vedanta Aluminium (VAL) and Malco to come into fold fully; Cairn India also to be its subsidiary
• Sesa’s outstanding shares to increase from 869mn to 2964mn. Value “Sesa-Sterlite” on SOTP basis giving a fair value Rs 207 per share and Mkt Cap of Rs 614bn
• At CMP of Sterlite (Rs 99) and Sesa Goa (Rs 187), the swap ratio valuation continues to be in favour of Sterlite shareholders by about 12%.

Major Milestone achieved
Vedanta during Feb 2012 initiated restructuring across its subsidiaries involving merger of Sterlite Industries into Sesa Goa in a 5:3 swap ratio. It also involved transfer of Vedanta’s 70.5% stake in VAL, 38.8% stake in Cairn India, 94.8% stake in Malco to new entity “Sesa-Sterlite” along with the associated debt of US5.9bn. The company received approvals from BSE, NSE and Competition Commission of India during April 2012. As mandated by law it was to get the Shareholders approval (at least 75%) through respective EGMs. The proposal received approval from 99% of Vedanta shareholders, 89% of Sterlite Shareholders and 79% of Sesa Goa Shareholders. This paves the way for it getting the Foreign Investment Promotion Board (FIPB) approval and seeking court approvals.


“Sesa-Sterlite” global major in the offing
With all of Vedanta’s subsidiaries (except KCM - copper company based in Zambia) coming under the Sesa-Sterlite fold it would become a diversified major having interest in ferrous metals, non ferrous metals (copper, aluminium, zinc, lead, silver), power and oil space. Further all expansions undertaken by the group would now be through this entity. The net debt for the consolidated ‘Sesa Sterlite’ stands at Rs 369 bn. The organization 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. The company has been sharing that this exercise would also be giving them “synergy benefit” of Rs 10bn every year.


Valuation:
We have valued the new entity (Sesa Sterlite) on SOTP taking in to account FY14 numbers to arrive at a fair value of Rs 207 (which translates into a market cap of Rs 614 bn). This implies a fair value of Rs 124 for Sterlite. Our FY14 EPS estimate for ‘Sesa Sterlite’ stands at Rs 38. Based on the Sesa Sterlite swap ratio (3:5) at CMP of Rs 99 for Sterlite and Rs 187 for Sesa Goa, the valuation is in favour of Sterlite by 12%. We believe this difference should get bridged as further milestones are met and restructuring completed by end of CY 2012.


Global peers including BHP Billiton, Rio Tinto, 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.


RISH TRADER