Visit http://indiaer.blogspot.com/ for complete details Impact on our views: We remain OW but still watch out
for some downside risks in the next 3-6 months before
the stock starts moving towards our price target.
What's new: Sterlite’s zinc division has reported
EBITDA of Rs10.9 bn (up 8.8% QoQ and 3.9% YoY).
The EBITDA was 3.1% ahead of our forecast. Notably,
the zinc division had contributed about 67% of Sterlite’s
consolidated EBITDA and 57% of its PAT in 1QF11.
What we liked in the results: (1) Mined metal
production rose to 205 kt, up 12.6% QoQ and 6.4% YoY.
(2) The new 210 kt zinc smelter produced 39 kt,
effectively running at 74% in the quarter. Achieving 74%
utilization in just its second quarter of operation is quite
creditable, in our view. Overall zinc metal production
grew 7% QoQ to 176 kt. (3) Admin, selling and other
expenses were brought down to their lowest levels in
four quarters, about 12% lower QoQ. Staff cost too at Rs
1.2b was the lowest in the last four quarters.
What we did not like: (1) Capacity utilization for older
zinc smelters (except for the new 210 kt hydro smelter)
remained uninspiring at 80%. In fact it fell 280 bps QoQ.
The lead smelter too produced 16 kt, implying utilization
of just 69%. (2) Zinc metal production cost, including
royalty was US$977/t , in our estimate 1% higher
sequentially. The quantum of QoQ increase is not too
big, but an increasing strip ratio has also fuelled the
recent production cost increase. As a sustainable
feature, that may hinder progress toward achieving
Sterlite’s long-run cost target. We estimate that between
4QF10 and 2QF11, production costs have risen by 8%,
despite a 23% fall in admin, selling and staff costs in the
period.(4) Cash and cash equivalents of Rs122 b
remained flattish QoQ despite the strong cash flows.
Lead smelter and SK mine projects are progressing
well: They are likely to be commissioned by 3QF11.
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