n Q2FY11 production numbers in line
Vedanta Group’s/Sterlite Industries’ (Sterlite) Q2FY11 declared production numbers were largely in line with our estimates. Lead production, however, was 7% ahead of our expectations.
n Copper, VAL, and BALCO expansions effectively on hold
The 100 ktpa lead capacity expansion has been delayed by a quarter and is now expected to be completed in Q3FY11. The 400 ktpa brown field copper expansion has been put on hold considering the high court order to shut the existing smelter due to environmental/pollution issues and pending approval from the State Pollution Control Board. The Supreme Court has currently issued a stay on the above order and hearing on the matter is scheduled on October 18.
With the Ministry of Environment and Forests withholding clearance for Vedanta Aluminium’s (VAL) bauxite mine and objecting to the alumina expansion, the company has effectively put on hold the entire expansion—alumina expansion at VAL to 5 mt from the current 1 mt, smelter expansions of 1.25 mtpa at Jharsuguda and 325 kt at Korba—at VAL and BALCO.
n Increased power available for merchant sales
The company had planned to source power from Sterlite Energy’s (SEL) 2,400 MW plant for its upcoming 1.25 mtpa aluminium smelter at Jharsuguda. With that project being deferred, the power available now will be sold on merchant basis. Similarly, the entire output from the 1,200 MW captive power plant at BALCO (for 325 ktpa smelter III) will also be available for merchant sales.
n Outlook and valuations: Project execution concerns; maintain ‘BUY’
We are revising down Sterlite’s FY11E and FY12E PAT 8% and 4%, respectively, after factoring in lower volume growth in Hindustan Zinc (HZL) and project delays in copper, VAL, SEL and BALCO. Cash costs at VAL are running higher than expected at ~USD 1,900/t even after considering purchased bauxite. While the various projects and environment related issues will be an overhang on the stock, we believe this has been factored in the stock price. From a longer-term perspective we see value in the business. We retain our‘BUY/Sector Performer’ recommendation/rating, but lower our fair valuation to INR 203 (earlier INR 214) considering the revision in estimates.
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