Accumulate Sterlite Industries – 3QFY2011 Result Update Angel Broking

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 Sterlite Industries – 3QFY2011 Result Update

Angel Broking upgrades Sterlite Industries to Buy from Accumulate with a Target Price of Rs. 206.

Sterlite’s 3QFY2011 consolidated net revenue stood at `8,294cr, well above our

estimates of `7,143cr. Net profit grew by 60.3% yoy to `1,101cr, slightly below

our estimate of `1,147cr mainly due to higher-than-expected raw-material costs.

Profits largely in line with our expectations: Sterlite’s 3QFY2011 revenue

increased 24.4% yoy to `8,294cr, well above our estimates of `7,143cr. Net sales

were above our expectations due to higher-than-expected realisation on zinc,

aluminum and lead sales. EBITDA increased by 10.9% yoy to `1,941cr. The zinc

business’s cost of production, excluding royalty, increased by 5.0% yoy to

`35,500/tonne. The aluminum business’s cost of production increased by 3.2%

yoy to `80,528/tonne. Consequently, EBITDA margin decreased by 283bp yoy in

3QFY2011. EBIT of the zinc and lead businesses grew by 9.4% yoy to `1,430cr,

which contributed 81.4% to Sterlite’s consolidated EBIT. EBIT of the copper and

aluminum businesses grew by 38.1% yoy and 121.5% yoy to `194cr and `119cr,

respectively. Sterlite’s net profit increased by 60.3% yoy to `1,101cr.

Outlook and valuation: Sterlite is currently trading at 6.8x FY2011E and 5.0x

FY2012E EV/EBITDA. We believe the company is well placed to capitalise on

strong metal demand through its expansion plans in the zinc-lead segment,

higher merchant power and silver sales. We continue to wait for the revised capex

plans of Sterlite and the outcome of the ongoing Tuticorin’s litigation.

We upgrade the stock to Buy from Accumulate with an SOTP-based Target Price

of `206.

3QFY2011 result highlights

Sterlite’s 3QFY2011 revenue increased by 24.4% yoy to `8,294cr, well above our

estimates of `7,143cr. Net sales were above our expectations on account of

higher-than-expected realisation on zinc, aluminum and lead sales. EBITDA

increased by 10.9% yoy to `1,941cr. The zinc business’s cost of production,

excluding royalty, increased by 5.0% yoy to `35,500/tonne. The aluminum

business’s cost of production increased by 3.2% yoy to `80,528/tonne.

Consequently, EBITDA margin decreased by 283bp yoy in 3QFY2011. EBIT of the

zinc and lead businesses increased by 9.4% yoy to `1,430cr, which contributed

81.4% to Sterlite’s consolidated EBIT. EBIT of the copper and aluminum businesses

increased by 38.1% yoy and 121.5% yoy to `194cr and `119cr, respectively.

Sterlite’s net profit increased by 60.3% yoy to `1,101cr.

Segmental performance

Copper segment affected by lower production

During 3QFY2011, copper cathode production at the Tuticorin smelter decreased

by 7.0% yoy to 78,990 tonnes due to a temporary shutdown following the

High Court order issued at the end of September 2010. Cost of production

decreased to 1.24 USc/lb in 3QFY2011 compared to 10.37 USc/lb in 3QFY2010

mainly on account of improved sulphuric acid realisation and improved

operational efficiency. Consequently, EBIT increased by 37.5% yoy to `194cr in

3QFY2011.

Strong performance from the aluminium segment

Balco’s aluminium production remained flat yoy at 65,000 tonnes during

3QFY2011. Balco plant 1 CPP continued to sell surplus power during the quarter.

Balco’s EBITDA increased by 41.0% yoy to `158cr. However, cost of production

increased to `80,528/tonne in 3QFY2011 compared to `77,964/tonne during

3QFY2010 mainly due to increased cost of alumina, coal and carbon.

The increase in costs was more than offset by rise in realisations, leading to a

300bp yoy improvement in EBIT margin.

Zinc-lead segment aided by higher volumes and prices

During 3QFY2011, Hindustan Zinc’s mined zinc production was higher by 11.3%

yoy and 8.5% qoq to 222,249 tonnes. On a sequential basis, zinc and lead

realisations grew impressively by 14.2% and 17.5% to US $2,473/tonne and

US $2,659/tonne, respectively, during the quarter. Average silver realisation

increased by 46.4% yoy and 34.2% qoq to `39,398. Thus, net revenue increased

by 17.4% yoy and 20.3% qoq to `2,163cr.

EBIT increased by 9.4% yoy to `1,430cr, led by higher realisations. However, EBIT

margin contracted by 588bp yoy during the quarter mainly on account of higher

stripping costs.

Key conference call takeaways

Balco linkage for power plant

Management informed that Balco has got a coal linkage for its 600MW power

plant. Further, it plans to open a coal block in the coming six months for its coal

requirements.

Cost of production at VAL

Management guided that it aims to bring down cost of production at VAL to

US $1,600/tonne from the current US $2,050/tonne.

Sterlite Energy’s (SEL) second unit to commercialise by 1QFY2012

SEL’s second 600MW unit of the 2,400MW plant is expected to be comercialised

by 1QFY2012.

Skorpion mine reported PAT of `62cr in 3QFY2011

Management indicated that the recently acquired Skorpion mine contributed `62cr

to Sterlite’s consolidated EBITDA during 3QFY2011. Sterlite plans to close the deal

for the rest of the assets by the next month.

Investment rationale

Zinc-lead expansion and power to aid growth: The 100ktpa lead smelter at

Rajpura Dariba is expected to be commissioned by 4QFY2011E. Further, the

company will have a silver production exit capacity of 500 tonnes by FY2012.

Although, the company has deferred its aluminium expansion, we believe it will

benefit from increased merchant power sale from Balco and SEL, benefits of which

are likely to be witnessed in FY2012E.

Arbitration panel allows government to freely sell Balco stake: An arbitration panel

has passed a ruling that Sterlite’s call option to acquire the balance 49% stake in

Balco was invalid and, hence, the government can freely sell residual stake

in Balco.

Sterlite had bought 51% stake in Balco for `551cr in CY2001 with a call option to

acquire the balance stake within three years. However, the dispute went

into arbitration due to difficulty in arriving at a consensus over valuation of the

residual stake.

Although acquisition of the residual stake in Balco could have triggered an upside

in the stock, we do not change our view and valuation on the stock, as we did not

factor in the acquisition of the residual stake in Balco.

We now await clarity on Sterlite’s purchase of 30% stake in Hindustan Zinc from

the government. We believe any positive development on this front would provide

a further upside to our target price.

Valuation

Sterlite is currently trading at 6.8x and 5.0x FY2011E and FY2012E EV/EBITDA,

respectively. We have revised our FY2011E and FY2012E estimates to factor in

higher prices at LME. Given the recent decline in the stock price and slight upward

revision in our target price, we upgrade the stock to Buy from Accumulate with an

SOTP-based Target Price of `206.