Accumulate Sterlite Inds; target of Rs 162: Emkay

“Balco an unlisted aluminium company is held 51% by Sterlite & the balance 49% is held by the Government of India. This 51% stake was taken over by Sterlite in March 2001 for a sum of Rs 5.51bn, in the Government of India’s divestment program. The agreement then was that the remaining stake would be sold to Sterlite through call options after three years. The operational performance of Balco improved significantly on account of debottlenecking and expansion activities taken subsequently. Further the improvement in LME prices also gave strength to Balco’s financials.”

“However the Government of India later backed out saying the agreed price was too low; pushing the issue into arbitration. The arbitration issue lingered on for several years without both the parties reaching a consensus. The Chairman of Sterlite had earlier during July 2011 written to the Prime Minister Office seeking their intervention. The Empowered Group of Ministers (Finance, Law, Mines & heavy Industries) had shared during late Nov 2011 that “status quo” will be maintained. However recently, there has been fresh news report stating Government has sought fresh proposal on Balco buyout from Sterlite.”

“At current capacity Balco generates EBITDA of about Rs 10 bn per annum. Giving a multiple of 5X and adjusting for net debt of Rs 22bn as of 31st March 2011 the current equity value of Balco comes at Rs 28bn. We currently have a target price of Rs 162 for Sterlite. The contribution on account of Balco’s 51% stake is just Rs 4 (Valuation in Sterlite essentially comes from HZL, Zinc overseas operations, Sterlite Copper operations in India & Sterlite Power),” says Emkay Global Financial Services research report.

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