Sesa Sterlite to become one of the world's top diversified resource company

The verdict on the vote for the merger of Sesa Goa and Sterlite Industries will be announced later today. The combined entity, Sesa Sterlite, will be one of the largest diversified resources players in the world with operations in iron ore mining, copper, Aluminium, zinc, lead, silver and oil & gas. Individually, the stock of iron ore miner Sesa Goa trades at a P/E multiple of 6.02, whereas the base metals player Sterlite Industries trades at a P/E of 6.9. But what sort of valuations should the combined entity have?

For the year ended March 2012, Sesa Sterlite's combined revenue stood at Rs 49,240cr. BHP Billiton, the largest resources player in the world, is six times the size of Sesa Sterlite. With a revenue of about Rs 3,14,400cr, the Anglo-Australian company's market capitalization is 2.9 times its revenue, 30% of which comes from iron ore mining, and the rest from coal mining, oil & gas, Aluminium and copper. Its operating profit margin has increased from 45% in FY10 to 58% at present. It currently trades at a P/E of 7.42 and a price-to-book value (P/B) multiple of 2.66.

With a turnover of Rs 2, 81,480cr, Brazil's Vale is 5.7 times the size of Sesa Sterlite. Its market cap is twice that of its revenue. Three-fourths of this revenue come from iron ore mining and the rest from coal, Aluminium, copper, nickel lead and zinc. This emerging market peer trades at a P/E of 6.01 and a P/B of 1.31.

With a turnover of Rs 2, 82,460cr, Rio Tinto is the second largest resource company in the world. The company has operations in coal, Aluminium, copper and diamond mining. Its market cap is 1.8 times its sales and it trades at a P/E of 5.83 and a P/B multiple of 1.16.