POST RESTRUCTURING – A VALUATION ANALYSIS of Sterlite Industries

We have analysed the whole restructuring of Sterlite Group announced by Vedanta Resources, the principal promoter of the group, yesterday and today we try to take a valuation call mainly on Madras Aluminium (MALCO) and Sterlite India Ltd. (SIIL) post-restructuring.

There has been only re-allocation of various projects between MALCO and SIIL and only one new project being Konkola Copper Mines (KCM) with 79% stake is added in SIIL. Asarco Project with 100% ownership having shown in post-restructuring of SIIL was already there with SIIL. The acquisition of ASARCO was confirmed by SIIL, by a release dated 31-05-2008, wherein, it was stated that a definitive agreement has been signed for the sale to Sterlite of substantially all the operating assets of Asarco, for $ 2.6 billion in cash. The release has also stated, that the asset acquisition will be financed by Sterlite through a mix of debt and existing cash resources.

So, it can be said that excluding 100% of Asarco from SIIL in pre-restructuring and showing it in post-restructuring is a mis-statement by the Vedanta Resources.

So to understand the valuations parameters, we need to look the market capitalization of MALCO and SIIL on pre and post-restructuring.

MALCO had its closing of Rs.152 on 5th September 08 and has been hovering in the range of Rs.140 to Rs.150 for the last couple of months. However, on 8th September, it closed at Rs.182 while on 9th September, closed at Rs.214. Obviously, rise in stock price of MALCO in those two days were due to restructuring news.

So, we have calculated market capitalization of MALCO taking market price of Rs.150 only. On 11.25 crore, issued shares of MALCO, market cap at Rs.150 works out to Rs.1,700 crores. Post restructuring, equity of MALCO would rise to about 131 crore shares (see yesterday’s cover feature) and at the current price of Rs.200 per share, it translates into a market capitalization of Rs.26,200 crores. This has resulted in an increase of Rs.24,500 crores in market capitalization of MALCO.

Now let’s have a look at market cap of SIIL. On pre-restructuring, SIIL had a market cap of Rs.42,500 crores, calculated on 70.85 crore issued shares, at Rs.600 per share. On post restructuring, issued shares of SIIL would rise to approx. 102 crore shares and calculating the same with the current market price of Rs.510 per share, it translates into a market cap of Rs.52,000 crores. This has resulted in a rise of about Rs.10,000 crores in market cap of SIIL, despite hiving off 51% stake of BALCO and 100% of SEL and adding just 79% stake of KCM into SIIL.

So, the effect of restructuring has resulted in an increase of Rs.35,800 crores in the market cap of MALCO and SIIL put together, as stated hereinabove. Now the question is – whether KCM stake of 79% is worth at Rs.34,000 crores?

On our estimates, we feel that the correct valuation of KCM stake of 79%, should be within a range of Rs.8,000 crores to Rs.11,000 crores.

This means that overvaluation to the extent of Rs.25,000 crores has crept in.

So, if we take pre-restructuring market cap of Rs.44,200 crores and add Rs.9,000 crores for KCM, it comes to around Rs.53,200 crores.

This needs to be apportioned between MALCO and SIIL and hence, on a ballpark figure, the same could be Rs.20,000 crores for MALCO and Rs.33,200 crores for SIIL.

If we take these valuations as the basis and divide it by expected outstanding number of shares of MALCO and present outstanding number of shares of SIIL, valuation of MALCO comes to at Rs.152 per shares while of SIIL at Rs.470 per share, on cum-rights or pre-restructuring basis. However, one may add Rs.5 to the value of MALCO share being value of 1 share of SIIL to be issued for every 51 MALCO shares held, thus having value of close to Rs.157.

Hence, there is room for correction in the value of MALCO share from Rs.200, which may fall to Rs.160 at the lower end, while SIIL shares could settle at Rs.470. The product profile of MALCO, post-restructuring, valuation of Rs.20,000 crores seems reasonable and justified.

We have seen many brokerages report having worked the valuations of MALCO and SIIL on various other parameters, but they are not easily understood by the common investors, and hence we have devised this formula of analyzing the valuation between both the stock.

In this whole restructuring process, the promoters have stood to gain as equity of SIIL is getting diluted by 44% by merely adding 79% stake of KCM and hiving off 51% stake of BALCO and 100% of SEL.

Post-restructuring, VAL would be holding 61% stake of SAL (now MALCO) thus making SAL as the subsidiary of VAL. Inspite of this holding subsidiary relations, SAL will be holding 15% of VAL, which is prohibited by the Companies Act, as a subsidiary cannot hold any stake in its holding company. Maybe, holding of SAL in VAL is presumed to have been parked in a Trust, for which beneficial ownership will be with SAL. We have seen this precedent in case of Reliance Industries Ltd., where, 7.20% stake of the company is held by the Petroleum Trust. beneficiary, of which is Reliance Industries Ltd. itself.

In nutshell, the restructuring move has been very good on part of Vedanta Resources but valuation Methodology having adopted on DCL led approach supplement by NAV and market value is purely loaded in favour of the promoters viz. Vedanta Resources and detrimental to the interest of public shareholders.

Vedanta Resources have been able to mop up Rs.34,000 crores for its 79% stake of KCM, due to which, SIIL has been forced to carry overcapitalized assets in its books and thus damaging the valuations and worth of the public shareholders. This has also raised finger on the Vedanta Group, for which they may have to pay a price in the long run. Wounds of Reliance Power are still raw and investors are in no mood tolerate the greedy and unprofessional attitude of any promoters.

Also, it will be wrong to say that it is value neutral for the shareholders, as majority of the public shareholders are holding SIIL shares and on aggregate valuation basis, post-restructuring, they will see erosion in their worth.

As stated hereinabove, share price of MALCO, may not fall much on pre-restructuring due to low floating stock as this will help the share price to rule above Rs.200. Once the supply of new shares of MALCO comes in, it is definite to rule between Rs.150 to Rs.160.

Also, presently one could acquire MALCO share, only from SIIL shares, whereby 7 shares of MALCO would be issued free of cost, for every 4 shares held of SIIL. So, this will provide a good support to SIIL stock at Rs.500 levels. On ex-basis, SIIL would finally settle at Rs.225 to Rs.230 levels.

NB:ARTICLE IS COMPILED BY ME IT’S NOT MY STUDY