Sector Update

September 25, 2014

Metals and Mining

SC axes 214 coal blocks, spares 4...
The Supreme Court (SC), in a landmark verdict on September 24, 2014
has de allocated 214 coal blocks out of the 218 coal blocks allocated since
1993. The four coal blocks which are exempt from the verdict are run by
the Central Government with no Joint Venture with the private sector. Out
of the four blocks which are exempted, two blocks are allotted to Ultra
mega power projects (UMPP) and one each to NTPC (Pakri Barwadih) and
SAIL (Tasra).
For the operational coal blocks the SC has given a time period of six
months to the companies to conclude their operations and hand over the
blocks to Central Government / Coal India by 31st March 2015. We await
further clarity with respect to the status of operational coal blocks post
31st March, 2015. Furthermore in case of operational coal blocks the SC
has directed the concerned companies to pay a levy of | 295/ tonne of
coal extracted till date from commencement.
Further course of action with respect to the coal auction or transferring of
mines to Coal India as a custodian will be determined by the Central
Government in due course of time. There exists ambiguity with respect to
the time line of the coal auction process and basis for deciding the
reserve price for the auctioning of coal mines and hence we await further
clarification for the same. Going forward for the operational coal blocks
which will be de-allocated post 31st March, 2015, for FY16E onwards we
have assumed coal sourcing through a blend of imported and e-auction
coal route.
The SC order is prima facie negative for metals companies. The SC order
is set back for companies which were planning to utilize coal blocks for
captive use. Furthermore penalty payment of | 295/tonne from the date of
commencement of block will result in notable cash outflow for the
operational blocks. Even though the ruling is short to medium term
negative, over a longer term horizon its charts out a more clearer path for
future mining operations thus resulting in better transparency in the
sector. Going forward companies with healthy cash flow and robust
balance sheet are in better position to tide the current challenging times
and are better placed in participating proposed auction process for
retaining existing / obtain new coal mine to feed end user plants.

ICICI Securities Ltd | Retail Equity Research

Rating matrix
Rating
Target
Target Period
Potential Upside

:
:
:
:

Hindalco (HINDAL)

Hold
| 148
12 months
-5%

Whats Changed?
Target
EPS FY15E
EPS FY16E
Rating

Changed from | 160 to | 148

Changed from | 17.9 to | 15.4
Changed from | 19.5 to | 17.7
Unchanged

Key Financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)

FY13
79674.9
7836.8
3026.9
15.8

FY14
87695.5
8286.3
2175.0
10.5

FY15E
97926.7
10403.3
3180.8
15.4

FY14
14.8
1.0
10.1
0.8
5.4
4.5

FY15E
10.1
0.9
8.3
0.7
7.3
5.7

FY16E
107038.3
11747.1
3645.6
17.7

Valuation summary
P/E (Diluted)
EV / Net Sales
EV / EBITDA
P/BV
RoNW
RoCE

FY13
10.6
1.0
10.0
0.8
8.6
5.3

FY16E
8.8
0.8
7.1
0.7
7.8
6.6

Stock data
Stock Data
Market Capitalization
Total Debt (FY14)
Cash and Investments (FY14)
EV
52 week H/L
Equity capital
Face value

| 32210.9 Crore
| 63348.4 Crore
| 11712 Crore
| 83847.3 Crore
199 / 86
| 206.5 Crore
|1

| 156

In the past Hindalco had been allocated 4 coal blocks, 1 operational and 3
non-operational block. Talabira-I coal block is the operational coal block,
while Mahan, Talabira-II and Tubed are the non-operational coal block. As
per the recent SC ruling all the four blocks of Hindalco will be deallocated.
Hindalcos Talabira-I coal block was allocated in 1994 and has extracted
coal output to the tune of ~18.5 Million tones till date from the date of
commencement of mine. The Talabira-I coal block feeds the captive
power plant of the Hirakud smelter. Mahan coal block is another vital coal
block of Hindalco which will be de-allocated. Though we have not
factored Mahan coal block in our FY16E assumptions (due to ongoing
uncertainty), de-allocation of Mahan will adversely affect the viability of
the Mahan smelter over a longer run. We had also not factored Talabira-II
and Tubed coal block as they were in early stages.
As per the recent SC ruling for the Talabira-I mine Hindalcos outgo with
respect to the penalty will be to the tune of ~| 546 crore. This additional
levy would also be charged on coal mine from the Talabira I coal block till
31st March, 2015. We expect the penalty payment to impact the FY15
P&L.
Going forward for FY16E we have assumed Hirakuds captive power plant
will be operate through a equal blend of imported and e-auction coal
which would lead to increased cost of production. For FY16E we have
modelled 50% coal sourcing through the e-auction route and balance
50% through import (as against captive consumption assumed earlier
from the Talabira -1 coal block) and subsequently our FY16E Hindalco
EBITDA is likely to decline by ~ 3.6% (~ | 440 crore) to | 11747 crore
(from | 12183 crore earlier). Based on our SOTP valuation the mine deallocation and penalty payment has resulted in ~ | 12/share impact on
our Hindalco target price, wherein our revised target price is | 148 (from |
160 earlier) assigning HOLD rating on the stock.

Price performance (%)

Return %
Hindustan Zinc
Sesa-Sterlite
Hindalco Ind

1M
-3.7
-3.5
-14.5

3M
-2.6
-5.7
-6.4

6M
33.3
57.9
28.4

12M
22.9
54.7
39.4

Analysts name
Dewang Sanghavi
[email protected]
Isha Bansal
[email protected]

Exhibit 1: Hindalcos SOTP Valuation

Particulars
Indian copper business EBITDA (FY16E, | crore)
Australian copper business EBITDA (FY16E, | crore)

Value
1515
231

Multiple
5.5
5.5

Indian aluminium business EBITDA (FY16E, | crore)

Novelis EBITDA (FY16E, | crore)
Total enterprise value (| crore), A
FY16E gross debt (| crore), B
FY16E cash & cash equivalent (| crore), C
FY16E net debt (| crore), D=B-C
FY16E minority interest (| crore), E
Value of investments (quoted, at 20% discount), F
Implied Equity Value, Market Cap (| Crore), H=A-D-E+F+G
No.of shares, I
Implied target price (|), H/I

3328
6673

6.5
7.0

Enterprise Value
8334
1272
21631
46709
77946
62348
11142
51207
1669
5396
30467
206.5
148

Source: ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 2

Rating matrix
Rating
Target
Target Period
Potential Upside

:
:
:
:

Sesa Sterlite (SESGOA)

Hold
| 270
12 months
-4%

Whats Changed?
Target
EPS FY15E
EPS FY16E
Rating

Changed from | 275 to | 270

Unchanged
Changed from | 34.8 to | 34.2
Unchanged

Key Financials
Z

(|Crore)
FY13
FY14
FY15E
FY16E
Net Sales
2526
65733
83206
91899
EBITDA (Core)
481
20360
29488
31931
Net Profit (Attrib)
2280
6299
7086
10144
EPS (|)
26.2
21.2
23.9
34.2
FY13P Nos are of Sesa Goa, FY14 onwards Nos are for the merged
entity Sesa-Sterlite

Valuation summary
FY13
FY14
FY15E
FY16E
PE (x)
10.7
13.3
11.8
8.2
Target PE (x)
10.3
12.7
11.3
7.9
EV/EBITDA (x)
32.4
7.5
4.9
4.2
P/BV (x)
0.6
1.1
1.1
1.0
RoNW (%)
13.0
8.6
9.0
11.5
RoCE (%)
1.3
8.8
12.6
14.3
FY13P Nos are of Sesa Goa, FY14 onwards Nos are for the merged
entity Sesa-Sterlite

Particular
Market Capitalisation
Debt (FY14) (Actual - A)
Cash, Liquid Invests (FY14) (A)
EV
52 week H/L
Equity capital
Face value

Amount
| 83613 Crore
| 80566 Crore
| 50797 Crore
| 113382 Crore
318/119
| 296.5 Crore
|1

Price performance (%)

Return %
Hindustan Zinc
Sesa-Sterlite
Hindalco Ind

In the past Sesa Sterlite had been allocated 2 coal blocks viz Durgapur
Taraimar II and Rampia & Dip side of Rampia both of which were nonoperational. Sesa Sterlites subsidiary BALCO had been allocated
Durgapur Taraimar II, which was in advance stage (had received all the
statutory clearances except for the mining lease execution) and was
factored in our FY16E assumption, while Rampia & Dip side of Rampia
coal block was another coal block allocated to Sesa Sterlite which was in
early stages and hence was not factored in our FY16E assumptions. As
per the recent SC ruling both the coal blocks of Sesa Sterlite have been
de-allocated.
As Durgapur Taraimar II coal mine is currently de-allocated, hence BALCO
is likely to source coal through a equal blend of imported and e-auction
coal which would lead to increased cost of production. Going forward we
have modelled 50% coal sourcing through the e-auction route and
balance 50% through import (as against captive consumption assumed
earlier) and subsequently our FY16E BALCOs EBITDA is likely to decline
by ~ 25% (~ | 425 crore) to | 1263 crore (from | 1687 crore earlier) . On
the consolidated entity Sesa Sterlite EBITDA impact is ~1.3% (Idirect
FY16E EBITDA: | 31931 crore). Based on our SOTP valuation the mine
de-allocation has resulted in ~ | 5/share impact on our Sesa Sterlite
target price, wherein our revised target price is | 270 (from | 275 earlier).
We have maintained our HOLD rating on the stock.
Exhibit 2: Sesa Sterlites SOTP Valuation
Company

Stock data

1M
-3.7
-3.5
-14.5

3M
-2.6
-5.7
-6.4

6M
33.3
57.9
28.4

12M
22.9
54.7
39.4

ICICI Securities Ltd | Retail Equity Research

| 282

Hindustan Zinc
Zinc International
Sterlite Standalone
BALCO
VAL
Sesa Goa
Cairn India
Cairn India
Acquisition Debt

EBITDA
(FY16E) Multiple
7785
1152
1353
1263
3554
1395

EV

5.5 42818
5.5 6338
5.5 7443
5.5 6945
5.5 19545
5.5 7673

Implied Attributable Equity

Equity Value
Value

Value per
Share

77258
10104
3385
4638
-700
3017
66567

45126
10104
3385
2129
-700
3017
35886

152
34
11
7
-2
10
121

-28370

-28370

-96

Others
SOTP Target Price

32
270

Source: ICICIdirect.com Research

10% Holding company discount is given for Hindustan Zinc, Cairn India and BALCO

Page 3

ICICIdirect.com coverage universe (Metals and Mining)

CMP
Company

(|)

EPS (|)

M Cap
TP (|) Rating

(| Cr)

FY14

FY15E

FY16E

P/E (x)

EV/EBITDA (x)

FY14 FY15E FY16E

FY14 FY15E FY16E

FY14 FY15E FY16E FY14 FY15E FY16E

ROCE(%)

ROE(%)

Coal India

351

400

Buy

221913

23.9

27.5

36.9

15.7

13.6

10.2

10.7

8.9

5.3

32.8

30.8

34.6

35.6

34.1

Hindalco Industries

156

148

Hold

32235

10.5

15.4

17.7

14.8

10.1

8.8

10.1

8.3

7.1

4.5

5.7

6.6

5.4

7.3

7.8

Hindustan Zinc

162

183

Buy

68255

16.4

17.0

19.0

9.9

9.6

8.6

6.3

5.9

4.5

16.5

13.6

14.1

18.5

16.9

16.4

1223 1,225

JSW Steel

35.7

Hold

29566

89.6

105.5

120.1

13.7

11.6

10.2

6.8

6.5

5.9

10.6

11.0

11.3

9.9

10.6

10.9

256

Buy

66909

16.2

19.2

21.1

10.4

8.8

8.0

7.0

5.3

5.0

25.4

28.2

27.9

21.4

22.2

21.2

69

78

Hold

28480

6.3

7.9

10.2

10.9

10.4

8.0

13.8

8.2

6.5

3.6

6.7

7.5

6.3

7.5

9.0

282

270

Hold

83494

21.2

23.9

34.2

13.6

12.1

8.4

7.6

4.9

4.3

8.8

12.6

14.3

8.6

9.0

11.5

Tata Steel
472 575 Hold
Source: Company, ICICIdirect.com Research

45870

37.3

43.8

50.9

12.7

12.4

10.6

7.4

6.9

6.3

8.7

9.5

9.9

8.5

9.1

9.8

NMDC
SAIL
Sesa Sterlite

169

ICICI Securities Ltd | Retail Equity Research

Page 4

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

[email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai 400 093
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Page 5