Saturday, July 14, 2012

>STERLITE INDUSTRIES: Acquisition in Vedanta Aluminium

Sterlite Industries’ annual report analysis highlights fresh investment in other group companies. With INR depreciation, large unhedged forex payables may lead to further MTM losses. While borrowing cost has gone up significantly, other income is likely to be subdued.

VAL an overhang; consol. debt, interest cost to swell post merger
At FY12 end, Sterlite Industries (SIIL) owned 29.5% stake in Vedanta Aluminium (VAL) (associate and fellow subsidiary) for INR5.6bn. However, a significant portion of the latter’s balance sheet was funded by SIIL by way of loans and advances (including preference share) of INR100.5bn (refer table 4). During FY12, Sesa‐Sterlite (SS) approved acquisition of balance 70.5% stake in VAL from Vedanta Resources. Our calculation suggests an enterprise value (EV) of INR320bn for VAL (refer table 6).

During FY12, VAL incurred loss of INR26.2bn (FY11: INR9.6bn) with SIIL’s share in it at INR7.7bn (FY11: INR2.8bn), 16.0% of FY12 PAT (FY11: 5.7%; refer table 7). With acquisition of balance stake in VAL:

• SIIL’s INR100.5bn loan to VAL will be eliminated.

• SS’ interest income will be lower as interest income from VAL will be eliminated. During FY12, SIIL earned interest of INR8.9bn from VAL (9.0 % of PBT).

• Additional loan in VAL of INR197.0bn will be part of the consolidated entity, leading to higher interest cost.

Fresh investments in other group companies jumped from INR7.8bn in FY11 to INR19.7bn in FY12; 4.3% of FY12 networth (FY11: 1.9%) (refer table 3).

Forex movement likely to be a major dampener
SIIL’s unhedged foreign currency net payable stood at INR113.0bn in FY12 (FY11: INR91.4bn). During the year, the INR has depreciated 14.6% versus USD, which has led to forex loss of INR7.2bn (7.3% of FY12 PBT) in FY12. With the INR depreciating ~10% in Q1FY13, the company is likely to suffer significant forex loss/finance cost.

Higher finance cost, damages provision drag down margin
Finance cost (including interest capitalised) jumped from INR6.5bn in FY11 to INR15.9bn in FY12, 16.1% of FY12 PBT (FY11: 7.1%), with average borrowing cost surging from 5.7% to 10.5%. During the year, the company provided incidental damages of USD82.8mn (INR4.2bn; net of deposit of USD50mn; 4.3% of FY12 PBT) for Asarco, US, as per US Bankruptcy Court judgement.

Other income comprising ~11% of PBT unlikely to sustain
Other income includes fair valuation of conversion option on convertibles of INR2.4bn and interest from VAL of INR8.9bn which is unlikely to sustain.

To read report in detail: STERLITE INDUSTRIES