Sesa Sterlite Likely to Get Rerated
Sesa Sterlite, a Vedanta group company, may be rerated as analysts are optimistic about its chances of buying the residual stake in Hindustan Zinc and Balco after the new BJPled government assumed power. The BJP-led NDA government had allowed the disinvestment of a majority stake in these two stateowned companies in 2002. The Anil Agarwal-owned Sesa Sterlite stock has rallied nearly 50% in the last one month and has been the best performing scrip in the benchmark index, Nifty. About 60% analysts have put a ‘buy’ recommendation on the company, which is at its highest level in six years, while only 20% have a ‘sell’ on it, and the rest have a ‘hold’. Shares of Hindustan Zinc have risen 18% in the period.
“In our view, completion of Hindustan Zinc stake purchase would lead to substantial rerating of Sesa Sterlite, as it would address the issue of cash fungibility,” said Pinakin Parekh, analyst at JP Morgan.
Analysts say once the government sells its 29.5% stake in Hindustan Zinc, cash and equivalent of about Rs 25,000 crore with the company will become fungible for Sesa Sterlite; besides, the company will also have access to future cash flows of Hindustan Zinc, which is expected to be over Rs 5,000 crore for the next couple of years. “Access to cash flows of cash-generating subsidiaries like Hindustan Zinc and Cairn India will be the key trigger for the stock’s performance. We retain our ‘buy’ rating on the stock,” said Ashutosh Somani, analyst at JM Financial Research.
The deal, if it’s concluded, will provide Sesa Sterlite unrestricted access to the current and future cash pile of Hindustan Zinc, which it can dip into to meet its debt obligations as well as fund future growth. Sesa Sterlite has a consolidated net debt of close to Rs 80,000 crore. “We expect rerating of zinc business to six times of EV/EBITDA against four times currently, post minority stake acquisition by Sesa Sterlite,” said Nandan Chakraborty, MD — institutional equity research at Axis Capital.
Finance Minister Arun Jaitley, at a meeting with officials of the department of disinvestment (DoD) on Wednesday, gave the go-ahead to the ongoing residual stake sale of Hindustan Zinc and Balco.