Sesa Sterlite: A Giant Poised To Enter The Big Five?

It’s taken four years from start to end, but it’s been worth the wait for the London-based Vedanta Group and its Non Resident India (NRI) mining billionaire Chairman Anil Agarwal.

Born at the end of this journey is, in fact, a giant. Sesa Sterlite, with a market capitalization of USD 21.72 billion, is not only one of the Top 10 Indian companies, but also the world’s 7th largest company by way of annual operating profits, as of now.

Sesa Sterlite came about because of the merger of two companies – Sesa Goa, India’s leading iron ore exporters and Sterlite Industries. Some days ago, both its stakeholders gave their go-ahead for the same. The new entity now has all the assets of Vedanta’s listed and unlisted companies in India—Sesa Goa (SESA), Sterlite, Vedanta Aluminium (VAL), Malco, Balco and Hindustan Zinc.

Sesa Sterlite has revenues of US $11.66 billion (Rs 664.31 billion), EBITDA of $4.3 billion (Rs 249.53 billion), and a net profit of $1.9 billion (Rs 109.71 billion), for the 12 months ended December 2011. The company claims cost synergies of US $175 million (Rs 10 billion) per year.

In one stroke, the merger improves cash flows of the parent company and also cuts debt exposure of the LSE-listed Vedanta Resources, after its US $8.67 billion purchase of oil producer Cairn India Limited, an oil and natural gas company whose acquisition was completed last December. The new company will also own the group’s majority stake in Cairn India.

At the time of the merger announcement, Indian newspapers such as The Economic Times said, quoting an e-mailed statement by Agarwal, that the transaction was “a natural evolution, leading to simplification of the group’s structure.”

So, what are the businesses under Sesa Sterlite? From iron ore mines, copper mines, smelters, aluminum, lead, zinc and silver, this giant will also cater to the oil and power business of Vedanta. This makes it similar to other monoliths (Vale, BHP Billiton) in size.

Analysts say the company may look at global acquisitions as a route to grow, since its iron ore mining business and greenfield aluminum operations in India have run into rough weather. According to a statement from the company, Vedanta Aluminum Limited, the Indian aluminum unit in which Vedanta owns 70.5% stake, and Madras Aluminum Company will also be consolidated into the new company. Earlier, concerns about operational hurdles and large debt inherited from the aluminum business were a sore point with many investors.

While debt on Vedanta will fall by about 61 percent to $3.8 billion, the merger would shift losses from Vedanta Aluminum onto the books of Sesa Sterlite. The company said in a presentation after announcing the merger that the debt-service cost would be reduced by $300 million for the year ending March 31, 2013.

This is the second time Vedanta is trying to restructure its business. An earlier restructuring attempt in 2008 had to be abandoned after it had met with opposition from shareholders.

Now, with the re-structuring over, the one question on top of everybody’s mind is — can Sesa Sterlite break into the Top 5, which includes the likes of BHP Billiton and Rio Tinto? Let’s wait and watch.

By Sohrab Darabshaw