SSLTs Q2FY15 Ebitda at R62.3 bn was broadly in line with our estimates (R65.0 bn). PAT (adjusted for forex gain) at R13.9 bn surprised on the higher side (vs. est. of R10.5 bn) due to lower depreciation and lower tax rate. The management expects a strong H2, driven by volume ramp up at HZ (Hindustan Zinc), higher aluminium production and better production run rate post planned shutdown in Cairn India. SSLT has multiple catalysts in its favour: approvals for SEL (Sterlite Energy) 2400MW (IPP to CPPindependent power producer to captive power plant), commissioning of Balco 1200MW PP (power plant), potential wins in coal block auctions, resumption of iron ore mining operations and importantly HZ/Balco stake buyout. We expect SSLTs de-leveraging story to play out over the next two years as the management focuses on sweating its aluminium/power assets and resolving its cash fungibility issues. Re-iterate Buy with R360/share FV.
Q2FY15Ebitda (earnings before interest, taxes, depreciation and amortisation) broadly in-line. SSLTs Q2FY15 revenues increased 8% year-on-year to R195.5 bn, ahead of our R188.6 bn estimates, driven by higher sales in the copper segment. Ebitda was broadly in line with our estimates though was down 8% y-o-y due to lower volumes in the higher margin segments like HZ and CAIR (Cairn India). However, the management guided for volume ramp up in HZ, Aluminium and CAIR to help SSLT post a strong H2FY15. This should more than make up for the fall in MIC (zinc, lead metal in concentrate) production in H1FY15. The management expects Cairn India to report higher volumes in H2 post the planned shutdown in Rajasthan and resumption of gas sales from Ravva block.
Aluminium volume ramp up is on track and commissioning of the 1200MW CPP and approval for IPP to CPP conversion of Jharsuguda 2400MW will further accelerate volume ramp up. Access to captive/linkage coal post coal block auction will be a key margin driver for aluminium operations.
Benefits of volume ramp up in the IO (iron ore) segment is expected to accrue from FY16e onwards. At Zinc international, new projects like Gamsberg will partly offset the fall in MIC production from Lisheen going forward.
Al & IO ramp up to boost standalone: SSLT's standalone financials deteriorated due to operational issues (IO mining ban and delay in ramp up of Aluminium & Jharsuguda 2400MW power plant) and addition of financially constrained Vedanta Aluminiums $4bn debt. Ramp up of mining operations in Goa/Karnataka and 1.25mt aluminium smelter in FY16 will boost standalone financials. Twin Star Holdings Limited (TMHL), which holds a 38.8% stake in CAIR, and associated $5.1 bn of acquisition debt, is facing a mismatch between interest expense and dividend income. SSLT will resolve the issue once HZs cash flows become fungible post the minority buyout. With no new major capex lined up, we expect the deleveraging theme playing out. We expect Net Debt/Ebitda (standalone) to decline from 16x in FY14 to 2.6x by FY17e.
Re-iterate Buy with FV of R360/share: We re-iterate our Buy on SSLT with FV (fair value) of R360/share. We value Sesa Sterlite using a SoTP (sum-of-the-parts) methodology. Our base case assumes the HZ and Balco stake sale goes through; in the event the stake sale does not go through, our FV for SSLT would fall to R283/share.