CLSA lowers Sterlite, Sesa Goa’s target price

MUMBAI: CLSA is of the view that the creation of Sesa Sterlite as part of the Vedanta group restructuring will be value-dilutive for the duo. The brokerage has downgraded Sterlite Industries to ‘sell’ from ‘underperformer’ and revised the target price to Rs 84 from Rs 102. It has also maintained ‘sell’ on Sesa Goa and cut the target price to Rs 140 from Rs 170 earlier.

“Lack of captive resources and adverse regulatory events has resulted in significant value destruction in the aluminium, iron ore and power businesses, which account for 46 per cent of capital employed. Valuations can improve if the policy negatives reverse, but there is little chance of this happening. The restructuring will increase the exposure of Sesa Goa and Sterlite to the unviable aluminium business, making it value-dilutive for both,” the report said.

According to the brokerage, the oil, zinc and copper businesses are better placed, but their profit growth will be muted.

“The oil, zinc and copper businesses are low cost and free-cash generative. However, their profit growth will be muted with low volume growth and weak commodity prices, and will not offset the negatives in the other businesses,” it said.

As per CLSA, Sesa Sterlite’s earnings should enjoy just a 2 per cent CAGR over FY13-15CL.

“Free-cash generation will be high but cash fungibility will be an issue for debt servicing. We expect the entity’s multiples to remain under pressure given the structural problems facing key businesses and weak earnings growth,” it added.

At 01:45 pm, Sterlite Industries was at Rs 101.30, up 1.30 per cent, on the NSE. It touched a high of Rs 101.55 and a low of Rs 99.65 in trade today. Sesa Goa was at Rs 171.50, up 1 per cent on the NSE. It touched a high of Rs 171.90 and a low of Rs 168.50 in trade today.