With power and aluminium no longer part of the company, valuations could take a hit.
Minority shareholders in Sterlite must be feeling somewhat shortchanged ; the company has been stripped of two of the more attractive businesses of aluminium and power. Sterlite will now house only the copper, zinc and lead businesses.
It’s not surprising that the stock came off by 7.5 per cent on Tuesday and valuations could suffer without the aluminium and power businesses. Shareholders of Sterlite will of course get a chance to share in the upside in the aluminium and power businesses. But the seven shares of Madras Aluminium (Malco) that Sterlite shareholders will get for every four shares they hold, say analysts, is not enough to compensate for the transfer.
Incidentally, Vedanta (the parent company) held an 80 per cent stake in Malco and only a 60.6 per cent stake in Sterlite. The Street ostensibly believes that shareholders of Malco, to which the aluminium and power ventures will be transferred, have got a better deal: the Malco stock was up 17 per cent. Not too many details are available about the profitability of Konkola Copper, which will now be part of Sterlite.
It’s not unreasonable that promoters would like to pool assets relating to a particular businesses in separate companies, to attract investments whether from strategic or financial investors. However, the promoters will hold 73 per cent in Sterlite post restructuring. So, if Sterlite is to benefit from an infusion of funds, fresh shares will have to be issued.
Zinc prices are currently ruling at $ 1782 per tonne, down 37 per cent from their peak in March 2008. Industry watchers believe that prices may have bottomed out, but fresh capacity is slated to come into the market in the next two years and supply could outstrip demand.
Even in the June 2008 quarter, Sterlite saw sales of both zinc and lead fall by nearly 40 per cent y-o-y. It was aluminium that performed well with sales up 35.8 per cent y-o-y due to better realisations of 7 per cent y-o-y. Before the announcement analysts believed the stock should command a multiple of about 11.5 times. However, that may now change.