We downgrade Sesa Goa to ?neutral? as we believe that the company has lost value on account of (a) iron ore mining bans in Karnataka and Goa; (b) worsening aluminum business due to the shortage of bauxite mines; and (c) forex losses due to the transfer of Cairn India acquisition debt from Vedanta Resources.
While zinc operations are going strong and the power business is steadily improving, it won?t be enough to outweigh the above negatives, in our view. We also lower our target price to Rs 179 from Rs 220 to account for the worsening operating environment.
We don?t believe that there are near-term triggers for the stock price. However, a few events that could create value are (a) the merger of HZ, post the stake sale by the government; and (b) allotment of a bauxite mine. We value the stock at Rs 179/share using the sum-of-parts valuation. Our valuation accounts for the restructuring of operations and for the merged entity, Sesa Sterlite.
On our valuation, the stock would be trading at ~5.4x FY14F P/E. We think a lower multiple is justified given (a) the overseas zinc business (which we value at 4.5x P/E) has a low mine life; and (b) a holding company discount is applicable to its stakes in HZ and Cairn India.
Sesa Sterlite is going through a tough phase with its various businesses facing operational and regulatory issues. While aluminum operations remain a drag on the consolidated company, even its iron ore operations are clouded due to the mining bans in Karnataka and Goa.
While we note that the zinc business continues to perform strongly and the power business is also showing steady improvement, the overhang of weak aluminum and iron ore businesses outweigh these positives.
We also note that the transfer price of the Cairn India stake from Vedanta Resources has increased due to the depreciation of the rupee. As a result, we reduce our target price to R179 and downgrade the stock to neutral. Since we set Sterlite Industries? target price according to the merger ratio of 0.6x Sesa?s target price, we also reduce STLT?s target price to R107 (from R132) and downgrade that stock to neutral as well.
Nomura
