Kotak Institutional Equities
According to unauthenticated media reports, decks are cleared for sale of government?s residual stake in Hindustan Zinc (29.5%) and Balco (49%). We believe the exit of the government from HZ and its probable integration with Sesa Sterlite will resolve liquidity issues at the standalone entity.
However, there are multiple loose ends in the deal execution that may scupper or delay complete control of HZ. The conclusion of Sesa Sterlite merger is a positive and creates a well-diversified entity ? improved liquidity will aid growth.
The reports also indicate that the government may sell its stake through offer for sale. The government did not accept Vedanta/ Sterlite?s purchase offer earlier including (a) call options exercised in 2004 and 2009; and (b) offer made on January 9, 2012 valuing HZ stake at R15,500 crore (~R124/share) and Balco stake at R1,800 crore.
Vedanta subsequently took a shareholder approval in August 2012 to sweeten the offer by ~15% in $ terms, implying R149/share for HZ and $550 million for Balco.
The deal is effective and positive for Sesa Sterlite if they get complete control of HZ (64.9% currently), which will resolve issues of fungibility of cash. The deal has multiple challenges of implementation. At the current market price, government?s stake in HZ is worth R14,900 crore. Size of the offering in the current market environment may not be easy to push without Sesa Sterlite?s active participation. More important, cash fungibility issues will not get resolved immediately if Sesa Sterlite does not fully participate in the government offer and subsequently delists HZ.
?Overweight? on Tata Steel
JPMorgan
Tata Steel has rallied ~25% over the last two weeks, driven by very strong beat in Q1 results, improving steel prices in Europe, under-ownership and positive Chinese commodity data, which has revived investor interest in the sector. News flow indicates pricing strength in Europe, with mills likely to increase prices in September, post holidays. We expect Tata Steel to continue be bid up in the near term.
The metals press highlights spot pricing strength in Europe. Long product prices have been increased across bars and sections. Local HRC prices are likely to increase further from here as customers come back from holidays in September.
Increasing import prices from China are positive, with Chinese HRC export prices remaining firm at ~$540/T, with an upward bias.While steel production in China has inched up again, inventories with traders and mills are not rising, implying consumption strength.
September and December are weak quarters, but given the benefits of flow through from improvement, we expect European operations to be Ebitda-positive compared to the last few years. Expectations remain low on Europe, with investors effectively giving a negative equity value to the European operations. We expect this to reverse gradually over the coming quarter, as profitability improves slowly but steadily in Europe.
