POSITIVE VIEWS
BROKERAGE: HSBC Global Research
ANALYST: Jigar Mistry
COMPANIES: Sesa Goa, Sterlite Industries
The holding structure under the proposed deal will be simplified to a large extent; tax inefficiencies would be resolved, since Vedanta Aluminium losses now become tax deductible, resulting in deal synergies. Tax synergies make the deal EPS accretive. Sterlite’s shareholders stand to benefit on swap (closing swap of 0.52 times compared to announced swap of 0.6 times). However the stock upside depends on asset restructuring. onsolidation results in ‘hard-to-ignore’ corporation–with FY13 estimated EBITDA of $6 billion and net income of $2.3 billion. The brokerage reiterates overweight on Sterlite Industries and Neutral on Sesa Goa.
The brokerage derives the target price of Rs 230 per share for Sesa Sterlite (and Sesa Goa) which on an implied basis (swap ratio of 0.6 times as per deal) indicates a target price of Rs 140 for Sterlite Industries.
BROKERAGE: CLSA
ANALYST: Abhijeet Naik
COMPANIES: Sesa Goa, Sterlite Industries
The restructuring of Vedanta's India businesses was inevitable and barring a couple of small grievances, has been broadly done in a fair manner. The resultant intra-group transfer of cash combined with cross-holdings was always frowned upon by share-holders and was an overhang on valuations. The announced restructuring plan simplifies the structure, allows an easier horizontal transfer of cash without dividend tax leakage and removes cross-holdings. CLSA’s analysis suggests that the restructuring is EPS dilutive for Sesa (target price Rs 230) and slightly value dilutive (around 6 per cent) for both Sesa and Sterlite (target price Rs 138). The share swap ratio of 0.6 times for Sterlite's merger into Sesa is fair.
BROKERAGE: ICICI Securities
ANALYST: Abhijit Mitra
COMPANIES: Sesa Goa, Sterlite Industries
We view the restructuring proposal for Sesa Goa and Sterlite as positive for existing share holders of Sterlite Industries (SIL) and neutral-to-negative for existing share holders of Sesa Goa.
The brokerage’s various scenario analyses suggests that an arbitrage play of overweight Sterlite or underweight Sesa Goa at current levels can give investors a return of 15-18 per cent.
In the bullish case fair value for the merged entity (Sesa Sterlite) comes to Rs266 per share.
The analysts currently have a buy rating on Sterlite (target price of Rs158 per share) and sell rating on Sesa (target price of Rs 192 per share).
NEGATIVE VIEWS
BROKERAGE: HDFC Securities (Institutional Research)
ANALYST: Dicksey Mathew
COMPANIES: Sesa Goa and Sterlite
As per the report, Vedanta Aluminium (VAL) assets have been overvalued in the proposed Sesa Goa Sterlite merger. Also now the decision on lifting the Karnataka mining bans which would have given a positive trigger for Sesa Goa will provide little upside, given the diversified nature of the behemoth. As per them the main positive of the Sesa- Sterlite merger is the Cairn India consolidation. The swap ratio as per them is in favor of Sterlite which will benefit the stock in the short term however from the earlier BUY rating on the stock, they are putting the stock now under review with a possible downgrade. Sesa Goa too has limited upside from hereon.Hence they maintain a HOLD rating.
BROKERAGE: Standard Chartered Equity Research
ANALYST: Satish Kumar and Saurabh Prasad
COMPANIES: Sterlite
Analysts believe that the restructuring will be incrementally negative for Sterlite shareholders.
They observe that in the simplified structure the Rs 9500 crore debt provided by the Sterite to Vedanta Aluminium extinguishes.
Nevertheless $5.9 billion debt raised by Vedanta Aluminium (VAL) to acquire Cairn India will be transferred to the new entity Sesa Sterlite .
Also VAL will remain in red for some time looking at the fact that management maintains VAL to take 2-3 years to receive its own bauxite resources. Therefore they are down grading Sterlite stock from their earlier ratings of OUTPERFORM.
BROKERAGE:Kotak Securities
ANALYST: Saurabh Agarwal
COMPANIES: Sesa Goa
As per the report proposed Sesa Sterlite Transaction provides No reasonable operational synergies. Mostly financial and taxation synergies are only probable, which also might be limited to large extent given that Cash cows for the Vedanta group, Hindustan Zinc and Cairn India would continue to operate as separate listed entities.
Cash flows from these subsidiaries can flow into proposed Sesa Sterlite, either by dividends which would attract considerable dividend distribution tax or by Intragroup cash transfers which might invite scrutiny and probable backlash from the minority shareholders of publicly listed entities Hind Zinc and Cairn India.
Further getting 16 approvals from different entities for the merger is cumbersome and time consuming process and unanticipated delays and bottlenecks can result in considerable disadvantage to Short/medium term investors.
