Investors concerned about Sesa-Sterlite's dollar debt

Investors of Vedanta group companies in India are jittery over the impact of the depreciating Indian currency against the US greenback on the $8-billion loan transferred to the group's Indian entities to acquire Cairn India Ltd.

This loan was transferred from the books of London-based Vedanta to the proposed merged entity called Sesa Sterlite Ltd, which will have a total net debt of $13 billion, analysts said. "We are awaiting clarity from Vedanta on its forex loans now transferred to the books of local entities," said a top official of a government-owned institutional investor.

Since January this year, the Indian currency has depreciated by 9.5 per cent against the US dollar.

Shares of both Sesa Goa and Sterlite Industries have crashed on the stock markets.

While the Sesa Goa stock is down by 30 per cent, Sterlite's crashed 32 per cent, compared to a 2.8 per cent fall in the BSE Sensex since January this year.

 

Vedanta's stock, too, is down 10 per cent since January this year. An email sent to Vedanta group did not elicit any response.

According to a JP Morgan report, the proposed merger between Sesa and Sterlite is beneficial to Vedanta as part of the debt at the parent entity will get transferred to the proposed entity.

"In our view, post (after) the merger, all of Vedanta's India operations -for that matter all operations, except copper in Africa - would be via Sesa Sterlite, thus aligning the parent with the local company.

The new entity would be a diversified resource major with improving free cash flows post FY14," said the report.

 

What is worrying investors is that the Indian currency's fall would hit reported debt numbers and net worth for the proposed merged entity, because almost $8 billion of debt is dollar-based. However, the translation loss is unlikely on the entire amount given a part of the debt is for capital spend. "A large part of any hit on the rupee fall would likely go through the reserves and not the profit and loss, as majority of the dollar debt is in a subsidiary. A large part of the earnings (ex power) are essentially leveraged to the $, and a weakening rupee is positive for reported earnings and cash flows," the report noted.

The key concern for Sesa Sterlite will be the huge debt of $13.5 billion, which is with the operating entity, whereas the cash flow visibility remains low.