Sesa Sterlite: Positive catalysts ahead

Environment ministry clearance for Goa mining and allocation of coal blocks a boost

The mining ban in Goa being revoked by the Union environment ministry saw Sesa Sterlite's stock touch Rs 202 levels intra-day on Wednesday.

Though it has given up some ground following the market correction and even as the global outlook for base metals, iron ore and crude oil (key businesses in which Sesa is present) remains muted, a majority of analysts remain positive on the stock.

The start of iron ore mining is positive for Sesa, which has 16 million tonnes (mt) annual capacity in Goa that is idle due to mining bans. The benefit in the form of rising output will take time as some approvals, including that of Indian Board of Mines and of the state pollution board are awaited. While the Supreme Court has set a production limit of 20 mt for Goa, weak global iron-ore prices (around $60 a tonne) and the low grade of iron-ore produced in the state will mean even lower prices for companies like Sesa. The 30 per cent tax on iron ore exports (Goa ore is largely exported) would also make exports unviable, feel analysts as Rahul Dholam at Angel Broking. Thus, sales will be restricted to select buyers like JSW Steel which have technology to blend high and low grade ore for steel production.

More important, expectations from segments like aluminium, zinc and power are improving. While weak base metal prices led the stock's fall from highs of Rs 318 in June'14, analysts remain hopeful. The coal block allocations can add to Sesa’s profitability in the aluminium and power segments. Beside, auction of natural resources (bauxite) can be another catalyst.

Analysts at Kotak Institutional equities say Sesa can deliver on high hopes of growth in FY16 in multiple areas, including ramp-up of aluminium smelters, zinc operations and the power business. This could be through a combination of internal initiatives and a more supportive external environment. However, the crude oil segment (Cairn India) remains a concern, given the falling international prices, which is profit growth of this segment.

Positively, Sesa Sterlite is taking steps to drive cash-flows. Apart from cutting costs and improving operational efficiencies that will lead to estimated savings of $1.3 billion over four years, it has also halved its capital expenditure forecast for FY16 to $1 billion. While analysts at Motilal Oswal have a target price of Rs 294, Kotak’s is Rs 250 and the average of analysts polled by Bloomberg in March is Rs 237.