The problems relating to the iron ore business may matter less to Sesa Goa’s prospects in the days ahead. With the Vedanta group deciding to restructure its holdings in mining and metals, Sesa Goa will soon be transformed into Sesa-Sterlite, with the merger of Sterlite Industries, and will house the group’s stakes in Cairn India, Vedanta Aluminium’s Indian projects and Balco. Vedanta proposes to issue three Sesa Goa shares for every five Sterlite Industries shares held. Post-merger, the iron ore business may bring in only 10-11 per cent of the entity’s combined profits, estimate analysts.

The merger seems to be quite a mixed bag, though it may shield Sesa to some extent from the risks of regulatory intervention in the iron ore mining business. Vedanta Aluminium, for instance, brings with it the risks of prodigious debt and the unavailability of bauxite for the refinery. Both Hindustan Zinc and Cairn India may churn out substantial cash, but cannot redeploy this in Sesa-Sterlite’s businesses as they remain separately listed companies.

Sesa’s MD, P.K. Mukherjee, is confident that the merged entity can handle the debt efficiently. “Considering the intrinsic value of the assets of the merged entity Sesa-Sterlite, the debt would be negligible,” he said. Sesa-Sterlite is expected to generate a revenue of Rs 66,431 crore and EBITDA (earning before interest, tax and depreciation and amortisation) of Rs 24,953 crore. Attributable net income works out to Rs 10,971 crore. Gross debt on the books will amount to Rs 66,717 crore and net debt Rs 36,936 crore. Given the average cost of funds at eight per cent, the total interest outgo is put at Rs 4,000 crore a year.

A recent Barclays Research report on the Indian metals and mining sector trimmed the price target for the Sesa Goa stock, noting that earnings uncertainty was high on account of the recent mining ban in Goa as well as the impending merger.

It said: “After the proposed merger with Sterlite Industries, Sesa Goa’s debt profile is likely to change significantly. Moreover, uncertainties with regard to the aluminium business in Vedanta Aluminium will prevail. Cash fungibility issues will remain as Cairn India and HZL will be separately listed entities.”

Is the company merely trading in old problems in iron ore mining for some new ones?

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