Sesa Sterlite (SSLT, Financial) is an India based company, which is involved in the exploration, extraction and mining of a diversified natural resources. The company focuses on zinc lead silver, iron-ore, oil and gas and commercial power with operations which spans India, South Africa, Namibia, the Republic of Ireland, Australia, Liberia and Sri Lanka.
The decline in stock prices from $19.78 to $13.31 in a span of six months makes me bullish on the stock as it now provides an excellent long term buy opportunity. I will discuss what the prime reasons are for the fall in the company’s prices and how the company is well positioned to benefit the investors in long term.
Oil and gas is the largest EBITDA contributor of the company and the decline in oil prices from $110 to current level of $46 is the primary reason for the fall in the company’s prices. However, I believe that this decline should be short term considering a better performance in 2015 by other segments of the company.
The company has most of its operations in India and with the change in government, the prospects of the company looks bright. With Mr. Modi becoming the Prime Minister of India, strong economic growth is expected. This is evident with strong market response post Mr. Modi’s election. Nifty has shown 47% increase since January 2014 and if we compare the performance of India with other BRIC countries, India has outperformed Brazil and China as well.
This is primarily because of a reform based approach of the government which focuses on governance, ease of doing business and fiscal prudence. There has been some of the major reforms for labour and also a control on diesel prices along with a major step to attract foreign funding from countries like China and Japan.
It is estimated that if the current government is successful in implementing its reforms then a 6% GDP growth is expected for 2015. Not only this, the government is also looking in to the industrial growth of the country and hence has been involved in changing the regulatory framework to further facilitate the growth of oil and gas and aluminium sector.
Mr. Javadekar, Minister of Environment, Forests & Climate Change:
“[The Prime Minister] has already asked us to delete the word delay… We are here to facilitate. The government’s role is not to create roadblocks for the industry. I believe our job is to give impetus to entrepreneurship.”
India’s fundamental also looks attractive with steel consumption intensity vey low as compared to the GDP per capita. Domestic demand is high which suggests there are high growth prospects and hence the economy is expected to remain strong. The current slowdown in the oil industry further provides exploration upside for India. Statistics shows that 32% of the country’s basins are yet to be offered for exploration and 78% of the offered basins are yet to be explored. Thus if $400mn/day of the oil and gas import is reduced then the unexplored basins can serve as a good production source. Cairn India’s (where Sesa Sterlite has 59% stake) production has increased over the years and the company has contributed 28% to the country’s total production. I believe the production is estimated to further trend higher as investments increase in the commodity sector.
Apart from good prospects of the country, the company also has a strong balance sheet and a well managed liquidity plans. The company’s cash flow from operations has been increasing over the years due to increase in a well managed production.
If we look at the company’s capex plans, the company has enough liquidity to meet the current overall capex with an estimated unspent capex of $3.8 billion by the year 2017. Also, as of September 2014, Sesa Sterlite has total cash and liquid investment of $7.6 billion with an additional $1 billion of credit lines. This further gives the company the flexibility of investments without increasing its leverage.
I thus believe Sesa Sterlite has huge growth prospects considering great economic stability of India and a healthy financials. Moreover, the company is trading at an EV/EBITDA of just 3.8 which also looks attractive and can be considered a good value investment for long term.
