Sesa Sterlite: We raise our 12-month forward target price to Rs 200 from Rs 165 and make some changes . We incorporate a revised US dollar to Indian rupee rate, which results in 1.7% and 6.6% change in FY14 and FY15 estimated Ebitda and build in new information on consolidated debt and cash balances. This results in $800 million reduction in our net debt numbers.
We have been positive on Sesa for some time but moderate the extent of optimism. The recent run-up in stock price takes out easy gains from the stock. Close to 94% of Sesa’s earnings are $-denominated. A R1 change against the dollar results in 1.5% change in Sesa’s fair value. We raise FY14-16 Ebitda estimates by 1.7-6.6%, a large part of the revision being led by Cairn India and zinc earnings.
Conversations with the company and updated presentations of Sesa indicate that two of the subsidiaries, zinc international and CMT, had lent money to another company on an arm’s length basis. While the company’s presentation captured the debt of the group company, it failed to recognise that this was done on an inter-company basis. This results in net reduction of $800 million in our debt estimate and in Rs 16 increase in fair value.
We have also made adjustments to the power business (minor increase) and the zinc international business (cut due to limited mine life and lack of clarity on the Gamsberg project). We have been positive on Sesa even after concerns about non-operational mines, delays in raw material security, stalled projects and inefficient capital structure.
Our positive view was led by distressed valuations of the shares. The recent 40% rise in the stock price moderates our optimism.