Sesa Goa rated as neutral, target Rs 210

Updated: Jun 13 2012, 16:57pm hrs
Sesa GoaSesa Goa rated as neutral, target Rs 210 A labourer works inside an iron factory in Lucknow. (Image: Reuters)
We have assigned a neutral rating to Sesa Goa with a target price of R210. We value Sesa Goas core business on a sum-of-the-parts (SoTP) basis with iron ore operations on a DCF-to-firm basis (5% debt-to-equity, 15% weighted average cost of capital).

We value Sesa Goa as a merged entity (Sesa Sterlite) and believe the merger with Sterlite Industries has a high likelihood of being successful. Recently, the Competition Commission of India approved the merger and the next leg of approvals rest with the Foreign Investment Promotion Board.

Sterlite Industries has signed a bauxite supply agreement with companies holding mining concessions. We look at an upside if the mines become operational after 3-4 years. However, we understand it could take significant amount of time to unlock value from these mines.

Sterlite Industries has entered into a tripartite agreement with Larsen & Toubro (L&T) and Raykal Aluminium (Raykal).

L&T holds certain prospecting licences for bauxite mines located at Sijmali and Kurumali of Rayagad and Kalahandi districts of Orissa. STLT will acquire 100% of equity share capital of Raykal in a phased manner at a total consideration of R18 billion in a milestone-based acquisition.

We understand from the directory of geology, government of Orrisa, that the mines have c250mt of reserves and parts of land are under 'village forest' category, thereby requiring forest clearance under Stage 2 of the ministry of environment & forests (MoEF) approvals.

Since L&T has a prospecting licence only, we understand that it would take significant amount of time for the company to finally sign a mining lease, if it manages to get the requisite approvals.

Assuming that it takes 3-4 years for the mine to start, and STLT incurs additional expenses ofR15 billion, we calculate potential upsides to our target price on a DCF-to-firm basis, based on these scenarios.

HSBC Global Research