Sterlite Industries (India)
Limited
Progress from Good to Great
Slows; Remain OW but with
Curtailed Conviction, PT
What's Changed
Price Target Rs263.00 to Rs222.00
Limited potent catalysts, rising risk of headwinds:
We remain OW on Sterlite – but with lower conviction, as
our reduced EPS estimates show. Our new DCF-based
price target of Rs222 still offers 29% upside from current
levels, though it is 16% lower than our earlier PT. Indeed,
we expect some downside in the stock in the next six
months before it starts to inch up towards our PT.
Why a markdown in our conviction: We believe that
risks of headwinds in the medium term have increased,
having analyzed the fallout from (a) denial of the
Niyamgiri bauxite mine to Sterlite, (b) issuance of a
“show cause” notice regarding alleged lack of approvals
for VAL’s refinery expansion, and (c) announcement of
Cairn India acquisition plans by Vedanta (Sterlite’s
parent). Per Factset, 90% of sell-side analysts have Buy
ratings and the rest have Hold – but the Street may start
getting edgy on (a) Sterlite’s capital allocation, and (b)
regulatory and procedural hurdles for Sterlite’s projects.
Our base case value is still higher than the current
stock price… Our EPS growth forecasts remain healthy
– 10% in F11, 58% in F12. This and Sterlite’s strong
volume growth and diversified product basket make us
think that P/E valuations – 8.5 xs for F12e – offer upside.
…but catalysts for a move up have lost punch:
However, the potential catalysts (commissioning of
power plant and bauxite mine and stabilization of a new
zinc-lead smelter) that we had been expecting to bridge
the valuation gap have either played out ,have fizzled
out or are losing potency. We remove the Niyamgiri
bauxite mine, push forward VAL expansion by two years
and include the Anglo zinc acquisition in our model now.
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