Sesa Goa shares gain 50% in a month, post Sterlite merger

MUMBAI: Investors are lapping up Sesa Goa shares after its London Stock Exchange-listed parent Vedanta Resources consolidated its metals-to-crude exploration business under one roof. The shares of Sesa Goa, which will now house zinc, aluminium, power, crude exploration and iron ore mines, have risen by over 50% in the past month. “The market seems to be appreciating the value Sterlite is bringing to Sesa, post merger. Solid zinc assets, improving aluminum and power business are some of the benefits handed down by Sterlite to Sesa,” said Vipul Prasad, research analyst at Morgan Stanley in a note.

The company, last year, decided to consolidate its corporate structure to tide over the cyclicality of the metals business with Vedanta Resources as the holding company. Morgan Stanley has revised its price target. “We have raised our ratings on Sesa Goa to ‘Overweight’ from ‘Equal-weight’ and price target to Rs 240 from Rs 154,” Prasad said. On Wednesday, the stock closed at Rs 188, a gain of 1.02% on the BSE.



In February last year, Vedanta Resources had announced the merger of Sesa Goa with Sterlite Industries and the stock rallied after it received legal approval in August. The market also pinned its hope on the government clearing Sesa Goa buying out its residual 49% stake in Balco and 29% in Hindustan Zinc.

“The buyout of residual stakes in Hindustan Zinc and Balco is an important step towards achieving more tax efficient corporate structure, and improving cash fungibility across group entities," Abhay Laijawala, research analyst at Deutsche Bank said in a note. “The buyouts are likely to be earnings accretive for Sesa Goa. We estimate fair valuation for the residual stakes in Hindustan Zinc and Balco at Rs 18,200 crore,” he added.

Hopes of government lifting iron ore mining ban in Goa and Karnataka, where Sesa Goa owns mines, also fired up its shares. Industry experts say the government, which is contemplating many steps to boost exports, may allow iron ore exports.

India’s export earnings from iron ore stood at more than $10 billion in fiscal 2011, before the Supreme Court banned mining. A depreciating rupee can also add to the company’s earnings significantly as less than one third of its revenues accrue from exports. Analysts say that for every 5% depreciation of the rupee, earnings will improve anywhere between 9% and 10%.

Zinc and aluminum prices in India are set on the basis of import parity, which helps the company benefit from currency depreciation.