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Showing posts with label SESA GOA. Show all posts
Showing posts with label SESA GOA. Show all posts

Monday, June 13, 2016

VEDANTA LTD : RISING FROM THE ASHES !!

Scrip Code: 500295 VEDL
CMP:  Rs. 116.80; Market Cap: Rs. 31,910.55 Cr; 52 Week High/Low: Rs. 190.95 / Rs. 58.15.
Total Shares: 273,20,67,720 shares; Promoters : 176,46,76,160 shares –63.34 %; Total Public holding : 96,73,91,560 shares – 35.40 %; Book Value: Rs. 129.90; Face Value: Rs. 1.00; EPS: Rs. 18.46; Div: 350 % ; P/E: 6.32 times; Ind. P/E: 10.78; EV/EBITDA: 16.45 times.
Total Debt: Rs. 77,952.03 Cr; Enterprise Value: Rs. 1,07,66,293 Cr.

VEDANTA LIMITED: VEDANTA Ltd was incorporated in 1954 and is based in Panji, Goa, India. It got converted into public limited company on March 25, 1981. It was formerly known as SESAGOA LTD and then changed its name on merger with Sterlite Industries as SESASTERLITE Ltd in 2013, again in 2015 the company changed its name to Vedanta Ltd. VEDANTA is an India-based global diversified natural resources company with operations in metals across zinc, lead, silver, oil and gas, iron ore, copper, aluminum and commercial power. It is also engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. The Company came with an IPO on November 1981, with 22,05,000 equity shares of Rs. 10 each at a premium of Rs. 2.50 per share. Vedanta gave its first bonus in the year 1978 in proportion of 2:3, then in 1986 in proportion of 2:5, in 1993 in ratio of 1:1, in 2004 in ratio of 1:1 and lastly in August 2008 in ratio of 1:1. Vedanta had last split the face value of its shares from Rs. 10 to Rs. 1 in August 8, 2008. VEDANTA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mining operations in India include Codli, Sonshi/Surla & Bicholim mines located in Goa & Narrain mine located in Karnataka. Sesagoa exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe. It also has mining interests in Western Cluster Iron Ore project, Liberia. In addition, the company produces basic, foundry and spheroidal grades of pig iron to steel mills and foundries as well as slag as a by-product to the cement industry and metallurgical coke, primarily low ash coke for foundries, blast furnaces & ferrous alloy industries. It operates Tuticorin smelter and India Copper Mines of Tasmania. Its custom smelting assets include a copper smelter, a refinery, a phosphoric acid plant, a sulfuric acid plant, a copper rod plant and two captive power plants at Tuticorin in Southern India, and a refinery and two copper rod plants at Silvassa in Western India. Its Iron Ore business consists of exploration, mining and processing of iron ore, pig iron and metallurgical coke and power generation. Its Aluminium operations include a refinery, a smelter and power plants at Lanjigarh and Jharsuguda. Its other activities include operation of its Vizag General Cargo Berth Private Limited in which it owns a 100 % interest. Further it engages in generation & distribution of power to Goa Electricity department & owns 30 MW power plants in Goa that utilizes the waste heat gases from its coke making & pig iron facilities as well as 30 MW waste heat recovery power plant. The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in SESA GOA from Mitsui & Co, Japan, for US$ 981 million. In April 2011, the Company acquired 10.4% stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). VEDANTA LTD is compared with OMDC, MOIL LTD, Hindustan Zinc Ltd, Sandur Manganese Ltd, Greenearth Resources Ltd, NMDC Limited, Godawari Power & Ispat Limited in India and globally with Rio Tino Plc of Australia, Vale of Brazil, BHP Billiton Plc of UK, Anglo American Plc of South Africa, Glencore Plc of Austrila, Anshan Iron and steel Group of China, Metalloinvest of Russia, Severstal's Karelsky Okatysh of Russia, Metinvest of Ukrain, Ferrexpo of Ukraine, Cliffs Natural Resources of USA, Sokolov-Sarbai Mining Production Association of Kazakhstan, APAC Resources Limited of Hong Kong.

Investment Rationale:
VEDANTA LTD has iron ore reserves and resources of 374m tons in Goa and Karnataka. Goa's ore is medium grade and easy to extract without blasting and crushing. The iron ore from Karnataka is of high grade but found in rocky form, which necessitates blasting and crushing. VEDL is India's largest private sector iron ore exporter and is an important Indian arm of Global natural resource player VEDANTA Resources PLC; in February 2012 Vedanta restructured its subsidiaries by announcing merger of Sterlite Industries into Sesa Goa in a 5:3 swap ratio, and later changed its name from SESAGOA to VEDANTA LTD. VEDANTA LTD contributes 27 % of India’s domestic crude oil production. India has 78 % of market share in Zinc, 48% in Aluminium and 34 % in domestic market in copper. VEDL managed to register strong performance in the aluminium division led by a decline in coal costs and higher realisation. However, aluminium production volumes were lower on a QoQ due to lower contribution from Korba‐II smelter and Jharsuguda‐I smelter. The ramp up at Jharsuguda‐II smelter too was slower than expected. It is estimated that the volumes to increase at Jharsuguda‐II smelter on the back of higher availability of power from 2,400MW power plant and lower coal costs. Aluminium production volumes were lower by 3.4 % QoQ and 1.3 % YoY. The impact of lower production on revenue was offset by some inventory liquidation. Aluminium sales volume was marginally higher on a QoQ basis. Realisations too were higher on a QoQ basis with an increase in import duty on aluminium from 5 % to 7.5 %. The impact of lower product premiums was offset by increase in share of value added products. Value added products accounted for 56 % of overall volumes. Outperformance in operating profit was largely led by a decline in cost of production. Lower coal costs coupled with a decline in alumina costs led to 6.3 % qoq decline in blended CoP. On a per ton basis, alumina costs declined by 8.7 % qoq and power costs were lower by 6.3 % qoq. The decline in alumina costs was largely due to lower production of high cost alumina and consumption of external cheaper alumina. The company was benefited from the sharp fall in alumina prices globally. Power costs declined due to increase in availability of linkage coal and a decline in e‐auction coal prices. Aluminium CoP at Jharsuguda declined 3.7 % qoq in Rupee terms and 5.9 % in Dollar terms on account of the above two reasons. CoP at BALCO too decline by 4.6 % QoQ in Rupee terms and 6.9 % in Dollar terms. Post the commissioning of the 300MW CPP at BALCO II, the company has put the high cost 270MW CPP on standby. Alumina production during the quarter was lower by 3.2 % QoQ and 23 % YoY due to the closure of one stream at its refinery. Aluminium business registered an operating profit of Rs. 355cr in Q4 FY16 against a loss of Rs. 11 Cr in Q3 FY16. Costs are expected to be lower in Q1 FY17 due to carry over of cheap alumina. However, this impact would be offset by an increase in global alumina costs. As a result, the company has restarted its 2nd stream of alumina refinery. It is targeting higher alumina production in FY17 as the company has received environmental clearance to raise its alumina production capacity from 1mtpa to 4mtpa. It plans to increase its capacity from 1.5mtpa to 2mtpa via de‐bottlenecking. The company has guided for volumes of 1.2mtpa in FY17, 30% higher on a yoy basis post the approval to use IPP as CPP and rampup at Korba‐II. Of the 1.25mtpa Jharsuguda smelter (4 x 313kt), 1st pot line started‐up on 1st April 2016 (to be ramped‐up in 3‐6 months). 2nd line is expected to commence ramp up from end‐Q2 FY16 and subsequently ramp up of 3rd line from Q4 FY16. Ramp up of 4th line would be Evaluated later. The 325ktpa Korba–II smelter has commenced ramp‐up in April 2016 and is expected to boost volumes on the back of commissioning of power plants. 2nd unit of 300MW of 1,200MW BALCO power plant commissioned in March 2016. The conversion of IPP to CPP would allow the company to utilize the low cost power produced at SEL for aluminium manufacturing without paying a fee to the government. The ramping up process at Jharsugudai II is under way and the company would rampup Capacities in FY17. The Chotia coal block has received all the necessary approvals and has started operations by end‐FY16. Laterite mine is also expected to start contributing from FY17. It also expects CoP to reduce from the current range due to lower coal costs, shutdown of high cost facilities, lower alumina costs and various cost saving measures taken by the company. VEDENTA’s copper business will have some improvement led by strong Tc/Rc margins and higher volumes. Its copper business continued to report strong performance in operating profit. Tc/Rc margins have been on the upswing over the last one year due to higher supply of concentrate. Tc/Rc margins increased on a QoQ basis to 24.8c/lb during the quarter. Last quarter performance during the quarter was impacted by flood in the region. Copper production was higher by 5.2 % yoy and 14.6 % qoq. CoP too decreased on a qoq basis on account of higher production. The sequential decline in operating profit was largely due to one‐time benefit of export incentives in Q3 FY16. The management expects Tc/Rc margins to be marginally lower on a yoy basis in FY17, in line with the change in global trends. The management expects maintenance shutdown of 10 days in FY17. HZL registered a sharp decline in topline due to both, lower volumes and lower realisation. The miss in topline was largely due to a sharp decline in zinc metal output. Mined metal output for the quarter was lower by 30.1% yoy and 17.5% qoq to 188,000tons. The decrease was on account of lower production primarily from Rampura Agucha open pit as per the mine plan, which was partially offset by record production from all the underground mines especially Sindesar Khurd. The sharp decline in output from Rampura Agucha led to a 29% yoy decline in refined metal zinc volume. However, higher contribution from Sindesar Khurd led to a sharp jump in integrated silver and lead output. Product premium was marginally lower for Zinc metal and higher for lead metal. The company has guided for subdued metal production in H1 FY17 as per mine plan, while maintaining its full year guidance of marginal growth in mined metal production. The mine expansion plan is on track and the company expects to raise its mined metal output by 1.2mtpa over the next three years. HZL reported 33.9% yoy decline in operating profit on account of lower realisations and lower volumes. This was quite lower than our estimate due to a sharp fall in zinc volumes. Costs were also higher due to a decline in average grade of ores. Power and fuel costs too decreased due to lower prices of e‐auction coal. CoP in Rupee terms was higher by 10.8% qoq and 14.2% yoy to Rs. 58,044/ton. The management expects costs to be lower going forward due to operating leverage. The Company has re‐negotiated several contracts to optimize costs and expect this to translate into significant savings in FY17, taking benefit from the recent commodity price downturn. In the international zinc division, production was lower by 17 % qoq due to lower production from Skorpion (maintenance shutdown) and closure of Lisheen mine. Costs declined by 21.3 % qoq in Q4 FY16 due to higher volumes at Skorpion and various cost initiatives. However, the decline in costs was lower than expected. FY16 production volumes stood at 226kt, out of which Black Mountain accounted for 63kt and Skorpion accounted for 82kt. The company expects FY17 volumes at 170‐190kt. It is focused on cost reduction initiatives by including labour and equipment productivity improvements. It expects FY17 costs to be US$1,200‐1300/ton from US$1,431/ton in FY16. The first ore production is expected 2018 and mines will reach rated capacity of 250ktpa in a year post ramp‐up. The capex will be US$400mn of which US$200mn will be spent in FY17. Vedanta managed to ramp up its iron ore operations in Q4 FY16. The company managed to sell 2.6mn tons of iron ore against 1.5mn tons in Q3 FY16. Production too was strong at 2.8mn tons against 1.4mn tons in Q3 FY16. The company exited Q4 FY16 at a run rate of 0.8mn tons per month. The jump in sales was supported by a rebound in global iron ore prices and removal of export duty on ore less than 58 % from 1st March ’16. The company has managed to reduce its costs on the back of operational efficiencies, contract re‐negotiations and resolution of transportation issue. The company is now in the 1st quartile for global cost curve for its Goa operations. It has guided for FY17 production of 5.5mn tons from Goa and 2.3mn tons from Karnataka. The company is pursuing to increase its environmental clearance in Karnataka from 2.3mn tons. Over the last two months commodity prices have bounced back from their lows on the back of inventory restocking, Dollar weakness and lower concerns over Chinese demand. It is believed that the base metal prices have formed a bottom and are likely to stay around current levels. Vendanta has managed to bind its loose ends over the last six months. Increase in availability if cheap coal has aided the company to reduce its costs sharply. This coupled with volume ramp up of low cost capacities would boost the company’s earnings over the next two years. Conversion of IPP to CPP would push aluminium volumes higher. It is expected that going forward VEDL’s debt to decline as capex outflow would be low and cash generation would be quite high at HZL and Cairn. Cost rationalization would further help the company in delivering strong numbers. In 2011, Vedanta Group acquired 58.5 per cent controlling interest in Cairn India from its UK parent, Cairn Energy plc, 20 per cent of this was acquired by Vedanta Ltd and 38.5 per cent by Twinstar Mauritius Holdings Ltd (TMHL) - a special purpose vehicle wholly owned by Vedanta Resources plc (VED). In July 2015, VEDL announced a merger with its subsidiary Cairn India, in which minority shareholders of Cairn India will receive 1 equity share of Vedanta for each Cairn India held and which is expected to be completed in this month of JUNE 2016. The effective merger ratio is of 1:1.04 after adjusting the preference shares allotted to Cairn’s shareholders, so Cairn India shareholders will get 104 Shares of Vedanta for every 100 shares of Cairn India held. This deal will make VEDL to have access to Cairn India’s Rs. 21,000 CR Cash. The merger with Cairn India did face some hurdles due to the widening spread but now it is expected to be completed by end of JUNE 2016. Post the change, the valuation of Vedanta would be at 4.9x FY18 EV/EBIDTA, which is attractive.  

Outlook and Valuation:  

Vedanta is formed with the merger of Sesa Goa and sterlite Industries. Vedanta is one of the largest natural resource companies globally with exposure to all the major commodities. It has refined zinc and lead capacities of 1.5mtpa in HZL and Zinc International, Crude oil production capacity of 225-240 kboepd, Iron ore production capacity of 17mtpa, Aluminium capacity of 2.3mtpa and 8.8GW (including current expansion) of power capacity. VEDANTA LTD contributes 27 % of India’s domestic crude oil production. India has 78 % of market share in Zinc, 48% in Aluminium and 34 % in domestic market in copper. VEDANTA has been focusing on operational improvement in various segments. In aluminium segment, it has been trying to improve its efficiency by reducing the cost of production. Lower alumina prices supported initially, however, with price rise, the company has started focusing more on ramping up its refinery. As 2400 MW power plant got CPP status, power cost also is likely to come down gradually. Both of these will result into lower cost of production. The management is expecting the CoP to come down to US$1250/ tonne in FY17 itself. In iron ore segment too, rise in global prices is likely to complement the company’s efforts to reduce the cash cost to US$14/ tonne. Both these segments have been under stress for a long time and operational improvement there would be positive. The capacity ramp up will help in better performance. The falling oil prices led to Rs. 12,304 crore of impairment charges on the balance sheet. However, the commencement of production capacity of 1.2 mt Aluminium (Jharsuguda Smelter), 9,000 MW Power plant along with ramping up of Iron Ore operations in Goa and Karnataka will provide necessary boost to the top line. The company has been able to reduce its debt level from Rs. 52,000 Cr in FY15 to Rs. 50,400 Cr in FY16. Overall on debt front, company has increased portfolio duration thereby reducing its interest cost from 8.2 % to 7.9 %. However, savings from interest will be partially offset by depreciation which is expected to increase by 20 %. The value of goodwill may also change post completion of the merger with Cairn India depending on the market conditions. Company is undertaking several costs saving initiative wherein it has been able to save $250 mn in FY16 and is targeting to save another $250-30 mn in FY17. On account of revaluation of assets and capitalization in Aluminum & Power Business Company has recorded higher depreciation in Q4 and is expected to increase by 20 % in FY17 also. Taxes have been lower in Q4FY16 on account investment income in HZL set off against carried forward tax losses. Going forward management expects tax to be close to MAT rate. Management has highlighted that reduction in oil cess from Rs. 4,500 per tonne to 20 % ad-valorem and increase in aluminium import duty from 5 % to 7.5 % will positively impact its business segments respectively. The company has Gross debt of Rs. 77,952 and net debt of Rs. 25,286 crore as on March 31, 2016, which are lower than Rs. 80,952 crore at December 31, 2015. Gross debt and net debt were lower over the quarter primarily on account of refinancing. Out of the total debt of Rs. 77,952 crore, the Rs/US$ split is 52 % and 48% each. During FY16, the company capex amounted to $600 million. FY17 capex is expected to be around $1.0 billion. FY17 maturities of $2.3 billion are a combination of $1.3 billion of short-term debt and $1 billion of term debt $1.3 billion of short-term debt is expected to be met through a combination of rollover and replacement with term debt $1 billion of external term debt and $1 billion of intercompany loan to Vedanta plc to be met through a combination of refinancing, working capital initiatives and internal accruals $200 million cash and liquid investments at Vedanta standalone $200 million refinanced in April $1 billion of undrawn committed facilities. The company expects to repay the remaining inter-company loan of US$ 1.8 billion at Cairn SPV over the next three to four quarters, having already repaid US$ 400 million in January 2016. Given the company is focused on deleveraging, the board has opted to not declare any dividend out of $3.3 billion debt obligation, management highlighted that $1.2 billion is to be funded through rolled over short term debt, $1 billion will be funded through Internal operation and other sources and for the balance $1 billion the company is negotiating with various banks. Company has increased duration of its debt portfolio which is expected to reduce interest burden going forward. On the coal requirement front w.r.t 9,000 MW power facilities, the company is expecting to source 25 % from imports, 20 % from Linkage, 40 % through IPP Linkages and balance through auction. Vedanta's reported a loss at the PAT level due to exceptional item (non-cash impairment charge). Going forward, with a positive view on the company’s domestic zinc business (HZL) and on account of strong underlying fundamentals VEDANTA will do better and its profitability will be mainly driven by higher zinc prices and improved iron ore profitability and also due to improvement in aluminium and power operations. Higher depreciation and tax will limit the net profit jump. Based on the expected improvement in aluminium and iron ore business and also higher estimates for Hindustan Zinc, the valuation of VEDL on SOTP basis comes at Rs. 125. At the CMP of Rs. 116.80, the stock is trading at P/E of 10.52 x FY17E and, 6.99 x FY18E. The company can post EPS of Rs. 11.10 for FY17E and Rs. 16.70 for FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs)73,710.0064,434.0076,274.0085,737.00
NET PROFIT (₹ Cr)(15,646.00)(9,323.00)3,304.004,965.00
EPS ()21.907.3011.1016.70
PE (x)4.8014.309.306.20
P/BV (x)0.600.700.700.60
EV/EBITDA (x)4.707.106.204.90
ROE (%)10.204.407.2010.10
ROCE (%)9.907.008.109.30

 As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase(Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold  VEDANTA LTD in my any of the portfolios.

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Wednesday, February 13, 2013

SESAGOA : SUCCESS THROUGH RIGHT CHANNELS !!!


Scrip Code: 500295 SESAGOA
CMP:  Rs. 170.65; Accumulate at Rs. 165 - Rs. 170 levels.
Medium to Long term Target: Rs. 208; 
STOP LOSS – Rs. 157.00; Market Cap: Rs. 14,831.21 Cr; 52 Week High/Low: Rs. 270.00 / Rs. 145.00
Total Shares: 86,91,01,423 shares; Promoters : 47,91,13,619 shares –55.13 %; Total Public holding : 38,99,87,804 shares – 44.87 %; Book Value: Rs. 148.58; Face Value: Rs. 1.00; EPS: Rs. 10.86; Div: 400 % ; P/E: 15.71 times; Ind. P/E: 16.99; EV/EBITDA: 6.82.
Total Debt: 3,961.00 Cr; Enterprise Value: Rs. 18,478.00 Cr.

SESA GOA LIMITED:  SESA GOA Ltd was incorporated in 1954 and is based in Panji, Goa, India. SESAGOA is engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. SESA GOA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5% of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mining operations in India include Codli, Sonshi/Surla & Bicholim mines located in Goa & Narrain mine located in Karnataka. Sesagoa exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe. It also has mining interests in Western Cluster Iron Ore project, Liberia. In addition, the company produces basic, foundry and spheroidal grades of pig iron to steel mills and foundries as well as slag as a by-product to the cement industry and metallurgical coke, primarily low ash coke for foundries, blast furnaces & ferrous alloy industries. Further it engages in generation & distribution of power to Goa Electricity department & owns 30 MW power plants in Goa that utilizes the waste heat gases from its coke making & pig iron facilities as well as 30 MW waste heat recovery power plant.  The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51% in SESA GOA from Mitsui & Co, Japan, for US$ 981 million. In April 2011, the Company acquired 10.4% stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). SESA GOA is compared with NMDC Limited, Godawari Power & Ispat Limited in India and with APAC Resources Limited of Hong Kong & with Ferrexpo Plc of United Kingdom globally.

Investment Rationale:
SESA GOA (SESA) has iron ore reserves and resources of 374 m tons in Goa and Karnataka. Goa's ore is medium grade and easy to extract without blasting and crushing. The iron ore from Karnataka is of high grade but found in rocky form, which necessitates blasting and crushing. SESA is India's largest private sector iron ore exporter and is an important Indian arm of Global natural resource player VEDANTA Resources PLC. 

In February 2012 Vedanta Resources Plc restructured its subsidiaries by announcing merger of Sterlite Industries into Sesa Goa in a 5:3 swap ratio. It involved transfer of Vedanta’s 70.5% stake in Vedanta Aluminum Ltd, 38.8% stake in Cairn India, 94.8% stake in Malco to new entity “SESA-STERLITE” along with the associated debt of US$5.9 billion. The company received approvals from Competition Commission of India in April 2012. The proposal received approval from 99 % from Vedanta shareholders, 89% of Sterlite shareholders & 79% of Sesagoa shareholders. This paved away the difficulties for it getting Foreign Investment Promotion Board (FIPB) approval & seeking court approvals. Post merger, Sesa-Sterlite will be one of the global commodity giant and its' earnings will be less volatile, supported by more stable operations  from Hindustan Zinc and Cairn India. Post merger Sesa-Sterlite will have contribution of earnings of about 39% from Oil & Gas; 29% from Zinc & Lead; 17% from Iron Ore; 6% from Copper; 4% from Silver; 3% from Aluminium and 2% from Energy. As on mining from Indian operations, the cost of mining and transportation is significantly lower in Goa (majority of operations) than in Karnataka and Orissa. Further, Indian miners are at an advantage over Brazilian miners due to their proximity to China, the largest customer. However, the current suspension of mining in Goa & Karnataka has resulted in nil production from these mines. Supreme court hearing is yet to start for Goa mining ban.

Outlook and Valuation:
SESA has acquired the remaining 49 % stake in WCL, Liberia at Rs. 184 Cr. Shipments are expected to start from 4QFY14, which will boost its earnings. SESA – STERLITE as a merged entity looks very attractive in valuations. Though uncertainties regarding the iron ore business persist, the impact on valuations is minor in view of the imminent merger with Sterlite Industries. The High Court of Mumbai, Goa bench is currently hearing shareholders' arguments against the merger. The company has already presented its case. The Chennai High Court has heard both sides and verdict is expected in this month of February 2013 .Though uncertainties regarding the iron ore business persist, the impact on valuations is minor in view of the imminent merger with Sterlite Industries and other group companies. Hearings have commenced in the High Courts of Mumbai and Chennai. All other approvals from shareholders and other courts in India and abroad have been received. The new entity “SESA-STERLITE” on Some of The Part valuations comes at Rs. 208 which transfers into the market capital of around Rs. 61,696 Cr. On merged entity basis, & at CMP of Rs. 170.65 the stock is trading at 4.35 x FY13E EPS of Rs. 39.20 and 5.06 x FY14E EPS of Rs. 33.70. Global peers including BHP Billiton, Rio Tinto, Teck Resources are trading at 8 x one year forward earnings & 4.2 x one year forward the EV/EBITDA. Considering the holding company structure and operational constraints SESA-STERLITE could fetch a lower valuation as compare to its global peers. One can buy SESAGOA Limited with a target price of Rs. 208.00 for Medium to Long term investment & for shorter term it should be Rs. 185.00.

SOTP Valuation :-

Business Subsidiary FY13E
Value Per Share (in Rs.) 
SESAGOA Standalone
(-118.00)
HINDUSTAN ZINC
145.00
BALCO LTD
4.00
ZINC INTERNATIONAL
39.00
CAIRN INDIA
144.00
OTHER SEGMENTS
(-6.00)
TOTAL 
208.00

KEY FINANCIALSFY12FY13EFY14EFY15E
SALES (Rs. Crs)68,369.8071,674.7072,998.0076,084.10
NET PROFIT(Rs. Crs) 10,279.3011,627.109,983.209,827.60
EPS (Rs.)34.7039.2033.7033.10
PE (x)5.104.505.305.40
P/BV (x)0.800.700.700.60
EV/EBITDA (x)5.405.505.104.80
ROE (%)17.0016.5013.2011.90
ROCE (%)25.3024.8013.3012.60

I would buy SESAGOA LTD with a price target of Rs. 208 for Medium to Long term and for Shorter Term the target is Rs. 185.00 . As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 157.00 on every purchase.

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Sunday, February 26, 2012

VEDANTA RESTRUCTURING: Sterlite & SesaGoa to merge !!!

As per the plan, the Sterlite Industries will merge into SESA GOA, which will be form as combined entity named to be SESA STERLITE. Sterlite shares holders will be given 3 Shares of SESA GOA for every 5 Shares of Sterlite held.

Vedenta Aluminium (VAL) and Madras Aluminium will be 100 % consolidated into SESA STERLITE. Vedanta’s direct holding of 38.8 % in Cairn India will be transferred to SESA GOA, together with the associated debt of $5.9 billion (Rs. 29,500 Cr) at cost. After the transfer, SESA STERLITE will have 58.9 % shareholding in Cairn India. The new entity SESA STERLITE will be seventh largest global diversified natural resources major by Earnings Before Interest , Tax and Depreciation. According to the chairman of VEDANTA Mr. Anil Aggarwal, SESA STERLITE will be the principle operating company in the group and with its high quality assets, growth projects and strong management; it is well placed to create value for all shareholders. This merger would be cost saving of around Rs. 1,000 Cr a year.

After consolidation, Vedanta will own 58.3 % in SESA STERLITE. The group’s 79.4 % shareholding in Konkola Copper Mines will continue to be directly held by Vedanta. Post consolidation VEDANTA will own 58.3 % stake in SESA STERLITE with VEDANTA PLC’s debt service liability will reduce by 61 % from $9.65 billion (Rs.48,250 Cr) to $3.8 billion (Rs.19,000 Cr). Post consolidation SESA STERLITE will have market capitalization of $20 billion (Rs. 1 lakhs crore) and will join the elite league of resources firms like BHP Billiton, Vale and Rio Tinto. Post consolidation the new entity SESA STERLITE will have net debt of $7.38 billion (Rs.36,936 Cr) with 8 % of interest cost.  

For SESA GOA – it will issue 3 Shares for every  5 shares of Sterlite; will issue 7.2 Crores shares to VEDANTA for its 70.5 % stake in Vedanta Aluminum; will issue 7.9 crores shares to Vedanta for its 94.8 % stake in MALCO

What VEDANTA will do – It will transfer its 38.8 % stake in Cairn India to Sesa Goa along with $5.9 billion debt. However, Hindustan Zinc and Bharat Aluminum Company in which government has stake will not be a part of merger.
SESA STERLITE will be listed in India and on New York Stock Exchange as American Depository Shares (ADS).        

SESA STERLITE STRUCTURE AFTER CONSOLIDATION
YEAR ENDED DEC 2011 Rs. Crore $ Million
REVENUE 66,431 14.23
OPERATING PROFIT (EBITDA) 24,953 5.35
GROSS DEBT 66,717 13.55
OUTSTANDING SHARES 296 Crore ----

Monday, February 13, 2012

SESA GOA LTD : Getting out from storm !!!

Scrip Code: 500295 SESAGOA
CMP:  Rs. 234.90; Buy at current levels.
Short term Target: Rs. 270, 6 month Target – Rs. 350; 
STOP LOSS – Rs. 216.10; Market Cap: Rs. 20,415.19 cr; 52 Week High/Low: Rs. 333.40 / Rs. 148.30
Total Shares: 86,91,01,423 shares; Promoters : 47,91,13,619 shares –55.13 %; Total Public holding : 38,99,87,804 shares – 44.87 %; Book Value: Rs. 133.34; Face Value: Rs. 1.00; EPS: Rs. 25.80; Div: 350.00 % ; P/E: 9.10 times; Ind. P/E: 19.44; EV/EBITDA: 4.70.
Total Debt: 1015.97 Cr; Enterprise Value: Rs. 22,127.32 Cr.

SESA GOA LTD:  SESA GOA Ltd was incorporated in 1954 and is based in Panji, Goa, India. SESAGOA is engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. SESA GOA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mines are mainly located in the Goa, Karnataka & Orissa. It exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe.  It also has mining interests in Western Cluster Iron Ore project, Liberia. The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in Sesa Goa from Mitsui & Co, Japan, for US$ 981 million. SESAGOA owns or have the rights of reserves & resources consisting of 306 million tonnes of iron ore. In April 2011, the Company acquired 10.4 % stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). SESA GOA is compared with NMDC Limited, Godawari Power & Ispat Limited in India and with Ferrexpo Plc globally.

Investment Rationale:
Iron ore prices have recently fell sharply from US$180/ tonne and now are recovering to US$145/ tonne. Also Iron ore imports earlier dipped in China due to fall in steel production till November, 2011; however, imports again rebounded in December 2011 supported by higher steel production which boosts the prices. The exports from India continued to remain lower. Inventory of iron ore at Chinese ports have been steady at 95 mt. During the quarter 0.64 mt of iron ore was sold from Karnataka through e-auction. Sesa Goa expects that the Karnataka issue to get resolved by Q4FY12 and to contribute about 6 mt in FY13 taking overall volumes to around 20 mt. The Shah Commission continues its verification in Goa and report is expected by March 2012. Goan ores being Haematite in nature is not suitable for pelletization which may cost SESA by little bit. Also the Western Cluster (Liberia project) is on track with encouraging R&R findings the first shipment is expected in FY14 which will bost Sesa Goa’s revenue substantially. Also SESAGOA’s total debt including forex debt constitutes of US$ 400 mn (FCCB of US$ 215 mn) which is low as compared to its industry peers which gives one a comfort to invest in the stock. There are some likely events due in FY13, which could have significant bearing on the company’s operational performance in FY13, Such as If the Supreme Court lifts ban on mining in Karnataka and SESAGOA is allowed to restart mining activities in Karnataka would boost FY13 sales volume tremendously which is POSITIVE for Sesa – the Supreme Court hearing is due by Q4FY12; Under the National Mineral policy the royalty rates are revised once in every 3 years and this time it is due in August 2012, and considering the recent regulatory environment it is highly possible that there may be a rate hike as the rate revision which is exected that it will not impact much negatively for Sesa Goa. Of course there could be 12 % negative impact in FY13 EPS of Sesa if the MMDR bill is passed in its same form and fashion, which is expected to be tabled in Budget session of the Parliament, which will be from March 14 to March 17th 2012. But I believe that the markets have already factored in these negatives in the stock prices. Also the Carin will contribute upto 20 % in the bottom line as profit from associates. On SOTP basis the valuation of the iron ore business comes at Rs. 87/share which is 3.5 x the FY13E EV/EBITDA and is in discount to upto 15 % from its global peers. The stake in CAIRN INDIA is been valued at 30 % discount to current market cap which comes to Rs. 107/share. Taking this into consideration the target price of SESAGOA comes at Rs. 250           

Outlook and Valuation:
The Ministry of Commerce has hiked export duty on iron ore from 20 % to 30 % for both lumps and fines. Sesa Goa exports close to 90 % of its total sales, and hence an export duty hike could lead to EBITDA estimates coming down by close to 20 % in FY13F-FY14F and earnings estimates coming down by close to 25 %. Indian exports of iron ore have come down by 40 % - 45 % during the past two years on account of earlier export duty hike of 20 % from 10 % and an also by export ban/mining ban in Karnataka. With such restrictions on transportation of ore in Goa, the local state Goa government has also suffered. All these factors together resulted in significant downturn in iron ore exports from India. It is believed that the above increase in export duty won’t impact exports significantly as - firstly the majority of iron ore being exported is from Goa, which produces low-grade iron ore and doesn’t have major demand in India. At the same time, transportation of ore from Goa will be very costly for domestic steelmakers due to logistic issues; and secondly even after export duty hike, companies such as Sesa Goa will have a decent margin (25- 30 %) and hence exports should continue. At the current market price of Rs. 234.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 27.10 in FY12E and Rs. 42.60 in FY13E. One can buy SESA GOA Ltd with a target price of Rs. 250.00 for Medium to Long term investment.

KEY FINANCIALS FY10 FY11 FY12E FY13E
SALES (Rs. Crs) 5,858.30 9,205.10 7,776.10 8,462.10
NET PROFIT (Rs. Crs) 2,629.10 4,209.10 2,351.10 3,706.00
EPS (Rs.) 31.60 48.40 27.10 42.60
PE (x) 6.40 4.20 7.40 4.70
P/BV (x) 2.10 1.40 1.20 1.00
EV/EBITDA (x) 5.20 3.40 7.40 7.10
ROE (%) 41.60 40.60 17.00 22.30
ROCE (%) 47.20 47.00 18.50 14.80

I would buy SESAGOA Ltd with a price target of Rs. 350 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 216.10 on every purchase.

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