STERLITE INDUSTRIES: Value ahead: Edelweiss

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STERLITE INDUSTRIES: Value ahead


􀂃 Revenue and PAT in line with estimates
Sterlite Industries India (Sterlite) reported consolidated net revenue of INR 60.8
bn (down 1% Y-o-Y, up 2% Q-o-Q) and net profit of INR 10.1 bn (up 5% Y-o-Y,
flat Q-o-Q) in Q2FY11. EBITDA, at INR 15.3 bn, was slightly above our estimate
of INR 14.7 bn. Current consolidated cash on books is INR 240 bn.
􀂃 Zinc and aluminium business performance improves Q-o-Q
Zinc business EBITDA increased 10% Q-o-Q, largely due to 7% increase in zinc
volumes, better zinc premiums, and lead concentrate sales. BALCO’s EBITDA
increased 47% Q-o-Q due to increased premiums and lower costs. Q-o-Q, the
copper business EBITDA dipped 20% due to 12% decline in production and
realized TcRc.
􀂃 Zinc business cash costs expected to dip USD 100/t going forward
Led by higher volumes, reversal of temporary ore grade reduction and
operational efficiencies, management expects reduction in zinc cash costs of USD
100/t in coming quarters. Our FY12 estimates include this benefit.
􀂃 2,400 MW power plant: First unit commences operations
Sterlite Energy’s first unit of 600 MW has completed all trial operations and is
available for commercial generation for next 5 months of FY11. The second unit
is expected to complete trial operations by December 2010.
􀂃 Copper, VAL, and BALCO expansions on hold; power on track
As already announced, the copper and aluminium expansions at Sterlite/BALCO
and VAL are currently on hold, leading to deferment of capex aggregating USD
1.5 bn. However, BALCO CPP of 1,200 MW is on track for unit-by-unit
commencement March 2011 onwards; all sales to be on merchant basis.
Similarly, SEL’s 2,400 MW power output to be sold entirely on merchant basis
(except for sales to GRIDCO). These are already factored in our estimates.
􀂃 Outlook and valuations: Value ahead; maintain ‘BUY’
We see headwinds for Sterlite due to project deferrals at VAL and BALCO and
potential fallout of reduced cash flows at VAL to service debt. However, we
believe the stock largely factors in these concerns. From a longer-term
perspective we see value in the business. We retain our forward estimates and
‘BUY/SP’ recommendation/rating with fair valuation of INR 203/share.