Sesa Sterlite rallies over 4%; Kotak upgrades to 'buy' from 'reduce'

NEW DELHI: Sesa Sterlite Ltd rallied as much as 4.3 per cent in trade on Monday after Kotak Institutional Equities upgraded the stock to 'buy' from 'reduce' as the stock now offers favourable risk-reward for investors.

The stock has plunged over 25 per cent in the past three months and could gain on improving zinc fundamentals from constrained global mine supplies, start of asset sweating of idled aluminum investments, and strong cash-flow generation drive, says the investment bank.

At 10:05 a.m.; Sesa Sterlite was trading 4.2 per cent higher at Rs 216.40. It hit a low of Rs 208.50 and a high of Rs 216.40 in trade today.

Kotak also believe Sesa Sterlite has the most to gain in the upcoming coal mine auctions with its large demand and locational advantage. They have cut their target price to Rs 250 from Rs 275 earlier due to lower long-term crude oil price assumption and moderation in aluminum prices.

Valuation looks attractive as the stock trades at 5.6X EBITDA (attributable) and 0.7X P/B on FY2016E financials and offers favorable risk-reward.

Kotak is of the view that Sesa Sterlite has the most to gain from coal mine auctions with large demand of 46 mtpa without adequate fuel-supply arrangements and the locational advantages of extant facilities.

The company can benefit from mine auctions given (1) current low utilization for its extant capacities and (2) commissioning of 3,200 MW of new capacity. SSLT's cash generation will get a boost besides HZ and Cairn from improving profitability of the aluminum business and iron ore mining.

Kotak has upgraded SSLT to BUY but slashed its target price to Rs 250 from Rs 275 earlier due to lower crude price assumption and moderation in aluminum prices. Their fair value assumes long-term crude oil prices of US$90/bbl and changes by Rs 14/share for each US$15/bbl change in crude prices.