Friday, June 15, 2012

>Sterlite acquires 24.5% stake in Raykal

Sterlite Industries has purchased 24.5% stake in Raykal Aluminum (Raykal) for INR 2bn. Raykal owns prospecting licences (PL) in bauxite mines in Orissa which can potentially feed Vedanta Aluminium‘s (VAL) 1mtpa alumina refinery. Though directionally positive, we believe mine commencement is 3-4 years away considering approvals and mine development processes. With uncertainties in obtaining mining approvals in India and the back-ended nature of mine commencement, we think it’s too early cheer on this development. We maintain ‘BUY’ with a target price of INR146.

Sterlite acquires 24.5% stake in Raykal with option to go to 100%
As per media reports and the Form 6K filed with SEC, Sterlite has acquired the 24.5% stake of Dubal Aluminium in Raykal in February 2012; the balance stake is with Larsen & Toubro (L&T). This JV was formed to set-up a 3mtpa alumina plant but this project never materialized. Raykal holds PL allotted in 1992 for bauxite mines located in Rayagad and Kalahandi districts of Orissa (VAL’s refinery is in Kalahandi). The entire bauxite excavated will be available to Raykal/Sterlite. Sterlite also has the right to acquire the entire stake of L&T in Raykal based on certain milestones (100% equity stake for total consideration of INR18.1bn). As per media reports the mine includes some forest area (challenges in approvals) and has reserves of 250-280mt.

Outlook and valuations: directionally positive; maintain BUY
Our estimates indicate that VAL’s aluminium cost of production would reduce from current levels of ~USD 1,950/t to USD 1,750/t as a result of captive bauxite. Assuming the mine commences in 4 years, we estimate its DCF value at ~INR29bn based on estimated reserves of 250mt. At the Sesa-Sterlite merged entity level this would translate to benefit of IN10/share (versus Sesa CMP of INR188). However, considering the above issues of approvals and mine commencement, we are not incorporating this in our valuation. We maintain ‘BUY/SO’ recommendation with a target price of INR146. At CMP of INR101, Sterlite trades at FY13E EV/EBITDA of 3.1x.