We maintain ‘add’ on Sesa Sterlite Ltd share price with a target price of Rs 210 per share. We estimate ebitda of Rs 520 crore for Sesa Sterlite’s Karnataka mining operations (including small portion for pig iron business) for FY15e.
Iron ore mining accounts for only 2% of the Sesa Sterlite's overall ebitda (Rs 28,100 crore for FY15e). We have not factored restart of Goa operations in our earning estimate as the Supreme Court is yet to decide on the restart of operations. We expect modest upside after the run-up, modest gains are possible from strong performance in zinc.
Sesa Sterlite is evaluating the option to commission first pot-line (3.13 lakh tpa) of its 1.25 mtpa Jharsuguda aluminum smelter. The power requirement for the smelter will be met from the 2,400 MW Jharsuguda power plant. The logic of switch to aluminum is rupee depreciation led increase in aluminum realisations, and low profitability in the power business from constrained generation due to factors such as low seasonal demand/evacuation restrictions/lack of PPAs and sale in exchanges on a high cost of generation.
Despite improved aluminum realizations (in rupee terms), we believe the economics of switch will yield moderate incremental operating profit. As per our estimate, the company can generate incremental ebitda of Rs 700-1,100 crore at the prevailing LME prices (and physical premiums) for commissioning of 1-3 smelter pot-lines, ie 3.13 lakh tpa to 9.38 lakh tpa of the 1.25 million tpa smelter.