RESTRUCTURING OF STERLITE INDUSTRIES

Sterlite Industries is presently under the Vedanta Group ,which has following listed entities in India.

1) Sterlite Industries (India) Ltd.

2) Hindustan Zinc Ltd.

3) Sterlite Technologies Ltd,

4) Madras Aluminium Company Ltd.

The group is engaged in production of Aluminium, Zinc, Copper, lead and Power through these companies. Since all these companies were acquired by the Vedanta Group in the last few years

Sterlite Industries, is predominantly a holding company.Madras Aluminium, is a very tiny company with capacity to produce 40,000 TPA of aluminium and this has been keeping the operations of the company stagnant. So the group has rightfully thought of merging its aluminium and energy business under this company. As the Vedanta Group has limited listed companies available, this is probably the best option to make use of a tiny company and make it a giant.

Hindustan Zinc is already growing, having created capacity to manufacture 7.20 lakhs TPA of zinc from 1.80 lakh TPA, when it was acquired by the group in 2003 – 04. Lead capacity was also raised four fold.

It is tough to analyze the valuation and prospects of Sterlite Industries, which has been holding 64.90% in Hindustan Zinc, 51% in BALCO, 100% in Sterlite Energy and 100% in Mt. Lyell Mine and Thalanga Mine referred as CMT assets. On standalone basis, the working of Sterlite Industries has been showing working of copper smelter only while consolidated working is required to be seen and analyzed to arrive at the correct valuation of Sterlite Industries.

As per restructuring plan, Sterlite Industries India Ltd. (SIIL) has decided to transfer following project to MALCO:--

1) Aluminium Foil plant at Sanaswadi.

2) 100% stake of Sterlite Energy Ltd.

3) 51% stake of BALCO.

4) 29.5% stake of Vedanta Aluminium Ltd.

MALCO will now be renamed as Sterlite Aluminium Ltd. (SAL) and the scheme shall be effective from 1^st April, 2009.

For acquiring these projects, MALCO will issue 7 equity shares of Rs.2 each of MALCO, to the shareholders of SIIL, for every 4 shares held by them in SIIL.

MALCO presently holding 246.10 lakh shares of SIIL, which will be transferred back to SIIL and lieu of this transfer, SIIL will issue 1 share of SIIL for 51 shares held in MALCO. Effectively 246.10 lakh shares of SIIL, now held by the MALCO are being distributed amongst the shareholders of MALCO and this would not result in any increase in the equity of SIIL.

Present equity of MALCO, which is now at 11.25 crore, shares would rise by another 119.68 crores shares and the capital structure and shareholding pattern of MALCO on pre and post restructuring would be as under :--

Before Restructuring

Promotor stake was 80% with 9 crore shares while Public holding of 20% with 2.25 crore shares

* shares of Rs.2 each with paid-up equity at Rs.22.50 crores.

After Restructuring

Promotrs holding reduced to 60.92% with 79.77 crore shares, Aloong with others (promoters) being 1.78% with 2.33Crore shares. Though the public hoilding will come to 1.72 % with 2.25 crore shares in the market.And Public (SIIL) with be finally the rest 35.58% with 46.58 crore shares

* shares of Rs.2 each with paid-up equity at Rs.261.86 crores.

MALCO will thus be having an aluminium capacity of 25.75 lakh tonnes by 2012 at three locations with Alumina capacity of 53.20 lakh TPA and captive power plant of 5,370 MW. In addition to this, the company will be owning 100% of Sterlite Energy.

On restructuring SIIL, it will get MALCO investment, being 246.10 lakh shares of SIIL back in itself for which 1 share of SIIL will be issued for every 51 shares held of MALCO. SIIL will also get 79.4% stake of Konkola Copper Mines Ltd. from Vedanta by merging THL KCM Ltd., Mauritius, for which, SIIL will issue 1 share of Rs.2 each of SIIL for every one share of US $ 0.01 held in THL KCM Ltd. by Vedanta.

So, on post restructuring, SIIL will hold 100% of Asarco, 64.90% of Hindustan Zinc, 100% of CMT and 79% of KCM.

The present equity of SIIL comprises of 70.85 crore shares of Rs.2 each of Rs.141.70 crores. However, due to acquisition of 79% of KCM and 100% of Asarco, equity of SIIL would rise from 70.85 crores shares of Rs.2 to 102 crore shares of Rs.2, from Rs.141.70 crores to Rs.204 crores.

Hence, hereon ownership pattern of the Vedanta group companies in India would be clear with –

1) Vedanta holding 51% of SESA Goa.

2) Vedanta holding 73% of SIIL.

3) MALCO will be holding 51% of BALCO. 100% of SEL and 15% of VAL. On group acquiring remaining stake of 49% of BALCO from the government, for which Arbitration proceedings are pending, BALCO shall be owned 100% by MALCO.

4) SIIL will be holding 65% of Hindustan Zinc, 79% of KCM and 100% of CMT, thus making it an end to end copper, lead and zinc player.

5) VAL will be holding 61% of MALCO while 85% of VAL shall be held by Vedanta while 15% shall be held by MALCO. MALCO name shall be changed to SAL.

This would make four independent companies of the group as under:--

1) Hindustan Zinc – producer of zinc and lead.

2) Sesa Goa – producer of iron-ore.

Both these companies won’t be having any investment or subsidiaries in other companies.

3) MALCO or SAL, will have aluminium and energy with 15% investment in its holding company VAL.

4) SIIL will be a direct end to end copper player with 65% stake in Hindustan Zinc. Also, if Vedanta group succeeds in acquiring remaining 29.54% stake of the government in Hindustan Zinc, it will go to SIIL. Hence SIIL is a focused end to end copper, zinc and lead player.

Though the share price of SIIL has corrected by 7.50% to Rs.575, it is a good buy at Rs.575 for a long term view. MALCO with equity base of Rs.262 crores on post restructuring basis and at the current market price of Rs.214 translates into a market cap of Rs.28,000 crores, which needs to get discovered by the market over a period of time.

The Plan for restructuring the companies is a good idea to make a justified arrangement of the company helping to analyze the stock at its best.