Sesa Sterlite (SSLT) is one of the world’s largest diversified natural resources companies with operations in base metals, iron ore, silver, oil & gas and commercial power. This article looks into the reasons to be bullish on the natural resources giant for the long-term.
For the nine months ended December 2013, Sesa Sterlite had a strong set of fundamentals. The company has a huge cash and liquid asset balance of $8 billion along with $1.2 billion in unused credit facility. This takes the total liquidity to $9.2 billion and this provides Sesa Sterlite with excellent financial flexibility.
Talking about financial flexibility, the company also has a comfortable debt maturity profile as shown below.
More importantly, the company’s debt to EBITDA currently stands at 1.3 along with a net gearing ratio of 25%. It therefore implies that Sesa Sterlite can leverage significantly in the future for growth or any potential acquisition.
Strong Cash Flows and Growth Investment
While Sesa Sterlite has the flexibility to leverage, the company’s robust free cash flow can enable it to fund growth through internal accruals. For the financial year ending March 2013, Sesa Sterlite has a free cash flow of $4 billion. Currently, for the nine months ended December 2013, the company’s free cash flow was $2.5 billion.
I wanted to highlight this as it points to the fact that the company has strong cash flow generating assets, which will help fund its big capital expenditure plans over the next few years. To put things into perspective, Sesa Sterlite plans to invest $4.6 billion up to FY2016. A bulk of the investment ($2.5 billion) will be targeted towards the company’s oil & gas asset. Besides this, $0.8 billion of capital spending will be allocated towards expansion of Zinc India and $1.2 billion towards aluminium smelters and other projects.
As these investments are made, they will translate into revenue and further free cash flow growth in the foreseeable future.
Prized Oil Asset With High EBITDA Margin
Sesa Sterlite's Oil & Gas operations comprise the assets of Cairn India in India, Sri Lanka and South Africa. My focus will be on Cairn India, which is India's largest private sector crude oil producer, contributing to over 25% of India's crude oil production.
Sesa Sterlite owns 58.9% of Cairn India. The company’s Rajasthan block is the largest onshore discovery in India in the last 20 years and has an estimated 7.3 billion barrels of oil equivalent in place with a basin potential to support a production rate of 300,000 barrels of oil per day.
The company’s Rajasthan asset has a reserve life of 15 years and has a current production capacity of 225,000boepd. With an investment of $2.5 billion on this asset for 2 years, the production will be ramped up significantly.
One of the biggest advantages for Sesa Sterlite is the kind of EBITDA margin generated by the Oil & Gas segment. While Sesa Sterlite has an EBITDA margin of 48%, the EBITDA margin for the Oil & Gas segment is 75%. This implies that the company’s EBITDA margin will witness a gradual uptrend as the production from the asset increases.
Attractively Valued As Compared to Peer
Freeport-McMoRan Copper & Gold (FCX), which is also a globally diversified natural resources company, can be considered as a good peer for Sesa Sterlite. Currently, Freeport-McMoRan is trading at an EV/EBITDA of 6.6 and price to sales of 1.7. Sesa Sterlite, on the other hand, is currently trading at an EV/EBITDA valuation of 6.0 and a price to sales of 0.9. Therefore, on both the metrics, Sesa Sterlite is undervalued as compared to Freeport-McMoRan.
What makes Sesa Sterlite more attractive is the point that the company’s operations are focused in India, where the growth potential is significant. This is especially true after yesterday’s election results in India, which gave a resounding victory to an investment friendly party.
India’s per capita consumption of commodities is way below the global average. Just as an example, India’s per capita consumption of oil per year in barrels is 1.0 as compared to China’s 2.7 and world average of 4.6.
With the kind of impending growth in store, Sesa Sterlite is best positioned to benefit being the largest private sector oil producer in India. Further to this, Sesa Sterlite is also India’s largest in zinc, lead, copper and aluminium production. The company is therefore best positioned to grow in the current scenario and benefit investors through dividends and capital appreciation. I recommend Sesa Sterlite as a Strong Buy for the long-term.