The new entity following Sesa Goa and Sterlite Industries is unlikely to cheer investors much as regulatory hurdles continue to eat away return ratios.
"Whilst the new Sesa Sterlite entity offers a simplified group structure with synergies and tax savings, it looks a little too like Europe with debt laden Greece (read aluminium assets) facing an uncertain future on one hand, and efficient, cost competitive, high quality Germany on the other (read zinc and oil assets)," Ritesh Shah and Anshuman Atri, analysts with Espirito Santo Securities, wrote in their note to clients today.
The analysts noted that Sesa Sterlite's growth plan across businesses have been hampered by regulatory issues. "The current scenario has not only resulted in $5 billion of projects in limbo leading to depressed return ratios, but also poses questions on the continuity of the iron ore, copper and refining operations," they said.
The brokerage feels minority buy-outs are critical for Sesa Sterlite since the merged entity will otherwise face a situation of a bloated balance sheet and uncomfortable interest coverage ratios in coming years.
"We expect Sesa Sterlite's consolidated EBITDA (earnings before interest, tax, depreciation and amortisation) to clock 5% CAGR (compound annual growth rate) over 2011-12 to 2014-15 on the back of volume growth in the power and aluminium operations, as its zinc, lead and ore operations report muted growth," the analysts said.
At 12:54 PM, Sesa Goa shares were at Rs 173.70 on the National Stock Exchange (NSE), up 0.9% from previous close. Sterlite Industries' shares were at Rs 102.05, up 1.1% over Friday's close.