Sesa Sterlite’s (SSTL) underperformance in our view has been more driven by a lack of any positive news flow on the regulatory front rather than the commodity sell-off. We believe the upcoming coal block auction is the first key catalyst, and we expect SSLT to be among the key bidders given stranded aluminum power capacity. We remain overweight and maintain our price target of R320.
SSLT would be a key player in any auction process: Given 8 GW of power capacity with nearly 5 GW effectively tied to aluminum, SSLT is likely to be a key player in any coal auction process. As of now, most of SSLT’s power capacities are not operating at any where close to full utilisation for a range of regulatory issues with coal availability a key operational constraint. In our view, regulatory approvals should start coming through over the coming months and access to captive coal should be a game changer. Captive coal would not only result in lower costs, but also allow for substantially higher aluminum production, even with imported alumina.
Assuming approvals for power plants come through, we believe captive coal would allow 1.5 MT of aluminum production to ramp up, which even on imported alumina, would generate $1.1.2 billion of Ebitda over the next 2-3 years which is currently not in our or street
estimates.
JPMorgan