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Price for Balco just right, says Sterlite

NetScribes/R Radhakrishnan & Salil Panchal

Has Sterlite Industries bagged Bharat Aluminium Company (Balco) at a very cheap price? Sterlite acquired the 51 per cent stake in Balco divested by the government for a total consideration of Rs 5.51 billion pipping Hindalco and US-based Alcoa to the post.

Sterlite says the price paid was just right but analysts feel the company was quite lucky to get it very cheap. The market's judgment of Balco's valuation was evident from the busy trading on Sterlite's counter on Thursday. On the Bombay Stock Exchange, the Sterlite scrip hit the upper circuit to close 7.36 per cent higher at Rs 169.

Sterlite will benefit from the Balco deal, say analysts. "Sterlite has struck a good deal now. It makes them the third largest player in the country. They now become an integrated player in the non-ferrous industry with the acquisition of Balco and also of copper mines in Australia. At the current P/E level, the scrip could touch the Rs 208 level,'' said an analyst with KR Choksey, a Bombay-based brokerage firm, who has been tracking the metals sector. KR Choksey has now put a 'neutral' recommendation on the Sterlite stock.

But Tarun Jain, chief financial officer of Sterlite, feels the price he paid was just right. "The government was expecting much lower proceeds from the divestment. Considering the depreciated assets and outdated technology, the price paid by us was just the right figure."

A valuation done by SBI Capital Markets a year ago prior to the capital restructuring of Balco pegged the company at Rs 30 per share which works out to Rs 3.73 billion for 51 per cent stake. Balco was established in 1965, and has depreciated assets and capital work in progress valued at Rs 5.04 billion.

An analyst from leading FII brokerage house, Credit Suisse First Boston (CSFB), also shares the same view. "The acquisition was a good deal. There is some concern in the market regarding Balco, considering its outdated technology and the fact that it is an unlisted security at the capital market."

The acquisition cost of Balco is attractive when compared with the capital cost of setting up a brownfield unit with auxiliary infrastructure. This cost would work out to Rs 20 billion. This doesn't take into account the opportunity cost lost during the gestation period.

Jain says, "We might have to infuse funds to update the technology in the near future." The positives of Balco are that it has a 270 MW captive power plant which at current market value is worth Rs 10 billion; free reserves of Rs 4.5 billion; low long term debt of Rs 1.5 billion and net profit of Rs 560 million. The negative aspects of Balco are its labour force and poor grade ore from its Madhya Pradesh mines.

The main concern of analysts is where the money for all these acquisitions will come from - considering that Sterlite has planned to acquire copper mines in Australia, the Balco deal and the possible buy-back proposal are all in the pipeline. "This would have to be managed carefully even while we consider that Sterlite has a positive cash flow,'' a senior analyst with KR Choksey said. Sterlite has also bid for the government's stake in Hindustan Zinc.

Tarun Jain seems unperturbed, "We have evaluated all the possibilities prior to the deal. We have enough cash in hand, internal accruals and if required we would leverage (with debt) to fund the acquisition. The entire process will get over in ten days." The cash in hand is estimated at around Rs 3 billion according to a senior vice president of the company.

Sterlite's gain from this acquisition will be in the form of dividend payment. In terms of business synergy, Balco would fulfill the raw material requirements of the group's companies and major downstream foils producer India Foils, in which Sterlite has a 55 per cent stake. Sterlite also has a small aluminium conductor business division which requires primary aluminium as feedstock. Balco has 100,000 tonne capacity to produce primary aluminium.

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