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STERLITE INDS 2QFY11: EBITDA in-line; VAL continues to make loss due to high leverage and cost; Maintain Buy
- Sterlite Industries (STLT IN, Mkt Cap US$12.5b, CMP168, Buy) adjusted consolidated PAT increased 17% YoY to Rs10.1b (v/s our estimate of Rs12.2b).
- Interest and financial charges include exchange gains of Rs715m v/s exchange loss of Rs262m in 2QFY10.
- VAL reported loss of Rs247m vs our expectation of Rs620m profit. At operating level, the EBITDA of Rs15.3b was in-line with our expectation of Rs15.6b.
ZINC: Refined production ramping up; however cost of production increased
- Zinc (MIC) production increased 6% YoY to 204,836 tons due to stabilization of new concentrator at Rampura Agucha (RA) mine. The low grade patch found earlier at the mine and water shortage at Chanderia smelter has been overcome. Mining costs are expected to remain higher for 12-18 months as a result of higher stripping ratio (15:1) at RA mine. Stripping ratio is expected to fall to normal levels of 6-7:1 in 12-18 months.
- Refined zinc production grew 8% YoY to 185,822 tons as recently commissioned Dariba smelter produced 39k tons during the quarter.
- The commissioning of 100ktpa lead smelter at Dariba is delayed and now expected to be completed during 3QFY11.
- Mine development at Sindesar Khurd (SK) mine is on schedule and new 1.5mtpa mill at SKM is expected to commence production by end 3QFY11.
- Ramping up of Silver capacity to 500 tons by FY13 is on schedule.
COPPER: Lower cathode production due to maintenance shutdown; EBIT declines 8% YoY
- Copper cathode production declined 22% YoY to 69,534 tons as smelter undertook planned maintenance shutdown for 22 days.
- Segment EBIT was lower 8% YoY to Rs1.6b as TcRc declined from 14.33USc/lb to 11.75USc/lb. By- product realizations remained flat QoQ
- Mined metal production at CMT Australia was 7,220 tons on expected lines.
- Although the MoEF clearance is in place for the proposed 400ktpa smelter expansion, the project is being rescheduled awaiting consent from the State Pollution Control Board. Construction of CPP is in progress and first unit is scheduled for commissioning in 4QFY12.
ALUMINIUM: Smelter & refinery expansion at Balco and VAL deferred; 1,200MW CPP to sell on merchant basis
- Aluminium production at Balco increased 2% YoY to 65,000 tons, while cost of production increased 16% YoY to US$1,748/ton.
- Construction of 1200MW CPP at Balco is delayed by 6 months. Management expects first unit of 300MW to get commissioned by March 2011.
- First metal tapping from 325ktpa aluminium smelter at Balco is temporarily deferred; hence entire 1,200MW power plant will be available for merchant sales.
- Balco’s call option arbitration award is expected in November 2010.
- VAL continues to make losses in the absence of captive bauxite and on account of interest and depreciation charges. VAL has total capital employed of Rs267b, which is largely funded by 3rd party debt of Rs135b and Rs112b of ICD. Sterlite Industries has provided ICD of Rs62b, which is Rs36b higher than its proportional share in ICD. Interests costs are high due to high level of debt funding and do not get absorbed by thin EBITDA margins. Aluminium production at VAL however increased 26% QoQ to 97,000 tons.
- First metal tapping from 1.25mtpa smelter is temporarily deferred till some clarity on bauxite is achieved.
ENERGY: Realization declined QoQ 37% to Rs3.44/kwh
- Revenue from power business declined 37% QoQ to Rs1.6b as realization declined 31% QoQ to Rs3.44 and volumes de-grew 14% to 414m units.
- Sterlite Energy’s first unit of 2,400MW project (4x600MW) was successfully synchronized in August; while second unit is expected to get synchronized in December 2010. Commercial generation is expected to start by January 2011. Rest of the two units will be commercially operational with a span of 3-4 months each from then.
Earnings growth to pick up; Maintain Buy
- The earnings traction is likely to intensify due to growth in earnings from energy business as Sterlite Energy ramps up 2,400MW project. Stronger LME will drive the earnings from zinc and aluminium business. VAL however is a drag due to deferment of its expansion and unfavorable decision on bauxite mine.
- Stock is trading at FY12 PE of 7.8x and EV/EBITDA of 4.5x. Maintain Buy.
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