INDIA DAILY March 16, 2015 India 13-Mar 1-day 1-mo 3-mo Sensex 28,503 (1.5) (2.2) 6.4 Nifty 8,648 (1.5) (1.8) 7.2 Contents Global/Regional indices Dow Jones 17,749 (0.8) (1.5) 4.0 Daily Alerts Nasdaq Composite 4,872 (0.4) (0.5) 7.1 Company alerts FTSE 6,741 (0.3) (1.7) 6.5 Sesa Sterlite: Sindesar Khurd mine visit takeaways - burnished by silver Nikkei 19,299 0.2 7.2 15.2 Hang Seng 23,823 0.1 (3.7) 5.1 Zee Entertainment Enterprises: &TV - well begun is half done KOSPI 1,985 (0.0) 1.4 4.3 DLF: Two events - some relief Value traded – India Dhanuka Agritech: Sempra: the new blockbuster Cash (NSE+BSE) 240 233 178 Derivatives (NSE) 3,160 2,392 2,421 Sector alerts Deri. open interest 2,381 2,407 2,287 Telecom: Spectrum auction update: 10 days of action over; we are likely in the last phase Forex/money market Change, basis points 13-Mar 1-day 1-mo 3-mo Rs/US$ 63.1 (0) 89 (74) 10yr govt bond, % 7.9 - 11 (9) Net investment (US$ mn) 12-Mar MTD CYTD FIIs 142 3,678 16,162 MFs 45 (628) 4,802 Top movers Change, % Best performers 13-Mar 1-day 1-mo 3-mo HDIL IN Equity 110.9 (4.6) (5.8) 78.7 SIEM IN Equity 1432.8 (2.7) 16.1 71.2 AL IN Equity 72.4 (3.5) 9.4 57.7 ADE IN Equity 634.1 (3.3) (4.4) 43.9 BHFC IN Equity 1289.0 (3.3) 9.7 43.8 Worst performers PNB IN Equity 166.1 (0.1) (0.4) (22.5) BOI IN Equity 216.0 (1.8) (8.1) (22.5) UNBK IN Equity 169.2 (1.1) (5.7) (19.5) BJAUT IN Equity 2023.1 (2.4) (10.6) (18.9) HMCL IN Equity 2610.0 (1.2) (7.0) (16.7) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY Sesa Sterlite (SSLT) Metals & Mining MARCH 16, 2015 UPDATE Coverage view: Cautious Sindesar Khurd mine visit takeaways – burnished by silver. An early ramp up of ore Price (`): 196 production from the SK mine will aid HZ’s volume growth (mid-single digit) over the Target price (`): 250 next two years even as volumes at its Rampura Agucha mine decline. SK has huge silver BSE-30: 28,503 potential with current mining grades (100 ppm) not reflective of the mine’s average global grades (155 ppm). Mine expansion and better grades can increase silver volumes to >500 tons from this mine alone. We maintain BUY on SSLT/HZ. Company data and valuation summary Sesa Sterlite Stock data Forecasts/Valuations 2015 2016E 2017E 52-week range (Rs) (high,low) 318-169 EPS (Rs) 19.3 22.0 28.3 Market Cap. (Rs bn) 580.8 EPS growth (%) 14.1 13.9 28.4 Shareholding pattern (%) P/E (X) 10.1 8.9 6.9 Promoters 59.5 Sales (Rs bn) 756.0 863.2 1,024.0 FIIs 17.0 Net profits (Rs bn) 57.3 65.3 83.8 MFs 1.5 EBITDA (Rs bn) 238.3 260.4 312.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.6 5.0 3.8 Absolute (7.7) (9.3) 13.4 ROE (%) 7.7 8.3 9.9 Rel. to BSE-30 (5.8) (12.9) (13.4) Div. Yield (%) 1.7 1.7 1.7 SK mine to support HZ’s volume growth over FY2016/17E as Rampura Agucha volume declines Hindustan Zinc’s volume growth over FY2016/17E will be largely driven by a ramp up of SK mines, as volumes from the Rampura Agucha mine will remain under pressure due to transition to underground mining. SK mine produced 1.7 mn tons of ore in FY2014, which can increase to ~2.5-3 mn tons in FY2016; the mine’s FY2015 production will be about 2 mn tons. Despite SK mine’s comparatively lower zinc (4.6%) and lead (2.6%) grades , an additional 1 mn tons from this mine can result in 70 kt of increase in mined metal production besides higher silver volumes. HZ expects SK mine’s volumes to increase to 3.5 mn tons in FY2017. Auxiliary mines to help, as the main production shaft will be commissioned only by CY2018 end Volume growth at SK mines over next three years will be supported by (1) production from auxiliary mines (SK 2 and SK 6), which together can produce an additional ~1 mtpa of ore, and (2) higher volumes from declines from the main ore body until the main production shaft is commissioned. The production ramp up from the main auxiliary mine will start from April 2015 and SK is targeting a 200 kt ore production in March. SK mine’s production until FY2019 will only be through declines, as the main production shaft will be commissioned by CY2018 end. While the shaft has mostly been excavated (1,000 mts out of the total depth of 1,050 mts), the commissioning timeline is based on equipment installation and other mine preparation works. Higher SK mine ore production and better grades will drive strong growth in silver volumes HZ’s silver volumes can increase by 87 tons from an additional 1 mtpa of ore production from SK mine assuming (1) recovery rates of 83% (84% from concentrator and 98.5% from smelter), and (2) better silver grades. The current ore mining is at ore body with lower grades – FY2014 treated grade was at ~105 ppm compared to 155 ppm of the total reserve grade. HZ is targeting 130 ppm of silver mining grades for FY2016, which can add further 60 tons of silver volumes. HZ can increase its captive silver production by 150 tons based on these two improvements. We maintain our mined metal volume growth estimate of 6-7% for FY2016-17 at 933 kt/ 986 kt. Our silver volumes estimate of 365/417 tons for FY2016/17 has upside risks from silver grade improvement at SK mines. We estimate the total silver potential from SK mine at >500 tons after expansion from higher volumes/better grades. We maintain our BUY rating on SSLT/HZ. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Sesa Sterlite Metals & Mining SK mines – we estimate silver potential at >500 tons after expansion We estimate the total silver volumes potential at SK mines at 490 tons, which can further increase by 85 tons from auxiliary lenses (mines) based on following drivers/assumptions. 3.75 mtpa Increase in ore production. SK mine’s FY2014 ore production was 1.7 mn tons, which is likely to increase to 2 mn tons in FY2015. After the mine expansion (first due to declines and then due to commissioning of the main production shaft), the total ore production can increase to 3.75 mtpa. We believe SK mine’s auxiliary lenses has the potential to add another 0.75 mtpa to production through the shaft of the main ore body. Improvement in silver grades. The average silver grade at the SK mine in FY2014 was only 105 ppm against the global mine average grade of 155 ppm (grams/ton). The average silver grades in FY2015 are still lower at ~100 ppm. SK’s silver grades are lower due to mining in areas with low silver content; these will improve as the mining moves deeper into the main ore body. Of the total 20.4 mn tons of proved and probable reserves at SK mine (1) 3 mn tons of proven reserves (where the mining is likely being carried on now) has silver grades of only 98 ppm while (2) 17.4 mn tons of probable reserves have silver grade of 165 ppm. SK mine is targeting ore production with silver grades of 130 ppm in FY2016. Silver recovery rates. SK mines’ silver recovery at concentrator is 84-85% and at the downstream smelter is ~98.5%. The silver is recovered in slimes from the lead smelter tank-house (residual of lead electrolysis process) and these slimes have between 17-25% of silver content. The slimes containing silver are transported in drums to Pantanagar refinery with virtually no process losses. We expect silver volumes to increase gradually with increase in ore production and improvement in grades over FY2016-2019. HZ’s total captive silver production in FY2014 was 301 tons (192 tons of integrated silver in 9MFY15), which included volumes from mines other than SK (mainly Rampura Agucha). Other points Metal recoveries. The mined metal recovery for SK mine ore is 90% for zinc, 88% for lead and 84-85% for silver. The smelter recovery for zinc is high at 97-98 % and for lead at 98.5%. Costs. The ore raising cost from the production shaft is lower than declines. We expect SK mine to benefit from commissioning of production shaft as it saves on high hauling costs through declines. KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Metals & Mining Sesa Sterlite Exhibit 1: Sesa Sterlite, Key assumptions, March fiscal year ends 2014-17E (` mn) 2014 2015E 2016E 2017E Volumes (tons) Zinc 750,766 729,911 766,677 782,203 Lead 121,120 125,924 127,324 155,697 Copper 293,575 366,096 367,984 374,059 Aluminum - Balco 252,172 323,675 500,225 559,075 Refined silver 347 330 365 417 Power (mn units) 7,530 9,421 14,273 15,129 Iron ore sales (dmt) 1,798 1,500 1,500 Base assumptions (US$/ton) Zinc 1,909 2,200 2,250 2,300 Lead 2,092 2,100 2,200 2,300 Copper 7,108 6,500 6,250 6,250 Aluminium (all in) 2,030 2,300 2,250 2,300 Dated Brent crude price (US$/bbl) 108 86 70 75 Source: Company, Kotak Institutional Equities Exhibit 2: Our SOTP-based target price for Sesa Sterlite is `250/share SOTP-based target price of Sesa Sterlite, March fiscal year-ends, September 2016E basis (` mn) Implied Sesa's Attributable EBITDA Multiple EV Net debt M Cap stake M Cap Contribution (Rs bn) (X) (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) Rs/ share BALCO 16 6.0 95 44 51 51 26 9 Zinc business Hindustan Zinc 77 6.0 468 (399) 867 64.9 563 190 Zinc International 11 4.5 47 (27) 75 100 75 25 Cairn India (fair value of KIE's energy team) 99 Debt from Cairn India acquisition 306 (103) Standalone (ex-power, iron ore) 62 6.0 374 352 22 100 22 7 Iron ore business 11 Power business (Talwandi Sabo) 12 Sesa Sterlite share price (Rs/ share) 250 Target price of Sesa Sterlite (Rs/ share) 250 Source: Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Sesa Sterlite Metals & Mining Exhibit