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Sesa Sterlite: Undervalued In Positive Environment

July 19, 2014 | About:
Faisal Humayun

Faisal Humayun

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Sesa Sterlite (SSLT) a diversified natural resources company is primarily engaged in exploring, extracting, and processing minerals, and oil and gas. The company has several positives in the immediate future and this will help the stock momentum bullish. This article discusses the key positives, which make Sesa Sterlite a good investment at this point of time.

The biggest positive for India current is the government change and renewed focus on growth and development. Sesa Sterlite, which generates a bulk of its sales in India, is set to benefit from the government change.

The new government recently announced the FY14 budget and the budget had a big focus on infrastructure and housing. This is likely to benefit Sesa Sterlite in a big way as infrastructure development and housing development will directly benefit commodity companies.

Another positive factor on the horizon is the resumption of mining in the Indian state of Goa. During 2011-12, mining was banned in Goa and Sesa Sterlite was negatively impacted by the ban. The company, which had exported 14 MT, of total 40 MT during the year 2011-12, before the apex court banned the mining activity in Goa.

With the ban on mining now lifted, Sesa Sterlite is likely to start mining after the monsoon in India and this will boost the company’s production output. After the mining resumes, the annual cap on exports would be 20 MT and Sesa Sterlite expects to achieve this with ease.

Sesa Sterlite had also offset the decline in production by increasing the ore output from Australia. With mining resuming, this will act as a strong revenue driver for the company. The positive impact of this will come in the last quarter of 2014 and beyond. However, the stock will start discounting the positive over the next few months.

Another positive catalyst on the horizon is the first quarter results of Cairn India to be released in July 23, 2014. Sesa Sterlite owns 58.9% of Cairn India. As crude oil prices are at elevated levels, the first quarter results are likely to be strong and a positive movement in Cairn India will also translate into positive sentiments for Sesa Sterlite.

Not just the first quarter results, Cairn India is also a long-term value creator and Sesa Sterlite’s 58.9% stake in the company will result in significant expansion of the company’s EBITDA margins.

Amidst all these positives, Sesa Sterlite also offers a dividend yield of 1% at current stock price of $19.78. Further, the company is still undervalued at a PE of 13.6, an EV/EBITDA valuation of 5.8 and a price to book value of 1.2. Freeport-McMoRan (FCX) is currently trading at a PE of 15.7, an EV/EBITDA of 7.2 and a price to book value of 1.9. Freeport-McMoRan however has a higher dividend yield of 3.6%.

Besides the relatively attractive valuation for Sesa Sterlite, the key difference between the companies is the fact that Sesa Sterlite will grow a more robust pace as compared to Freeport-McMoRan over the next 3-5 years.

Freeport-McMoRan is certainly not a sell, but on a relative basis, Sesa Sterlite will give higher capital appreciation while Freeport-McMoRan will continue to give robust dividends. Freeport-McMoRan is also betting big on the oil & gas sector and the sector can change the company’s growth outlook over the long-term. For now, Sesa Sterlite has an edge in terms of being a faster growing company.

In conclusion, Sesa Sterlite has several positives in the pipeline and these positive factors can result in strong stock upside over the next one year. Even considering a long-term perspective, Sesa Sterlite will outperform the broad markets and is therefore a good stock to have in one’s portfolio.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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