buy Sterlite Industries PAT increased 10% YoY: Motilal oswal

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

 Sterlite Industries (STLT IN; Mkt Cap USD13.3b, CMP Rs179, Buy)

 Sterlite Industries adjusted consolidated PAT increased 10% YoY to Rs11b lower than our estimate due to higher losses at VAL and lower other income.

 Zinc (MIC) production increased 9% QoQ.  The acquisition of Anglo’s Skorpion mine was completed in Dec 2010. Skorpion produced 13.2k tons of refined zinc.

Copper cathode production grew 17% QoQ to 78,990 tons despite temporary shutdown following the Madras High Court order in September 2010

 Aluminium production at Balco remained flat QoQ at 65,459 tons and cost of production increased 3% QoQ to US$1,795 largely due to rupee appreciation.

 Revenue from power business declined 19% QoQ to Rs1.3b as realization fell sharply by 21% QoQ to Rs2.72/kwh and volumes grew 10% to 454m units.

 FY11 and FY12 EPS are cut by 5% and 3% to Rs12.8 and Rs21.4, respectively, after factoring in (1) positive contribution from zinc acquisition, and (2) slippage in Sterlite Energy’s power unit. Stock is trading at 

 FY12 P/E of 8.4x and EV/EBITDA of 5.4x. We value the stock at Rs221 based on STOP. We remain positive on the stock as both zinc and energy businesses have potential to drive earnings stronger than 

 estimates. Maintain Buy.

 Sterlite Industries' adjusted consolidated PAT increased 10% YoY to Rs11b, lower

than our estimate of Rs13.1b, due to higher losses at VAL and lower-than-expected

other income.

 VAL posted losses of Rs1b, higher than our estimate of Rs198m. At the operating

level, EBITDA of Rs19.8b was in line with our expectation of Rs19.9b.

Zinc: mined metal production up 9% QoQ, Skorpion mine acquisition

completed in Dec'10

 Zinc (MIC) production increased 9% QoQ to 222k tons due to recently commissioned

stream IV concentrator at Rampura Agucha. Production of refined zinc is ramping up

at a slower pace; grew 1% QoQ to 178ktons. The recently commissioned Dariba

smelter produced 46,500 tons in 3QFY11.

 Lead and silver production declined due to a maintenance shutdown at the Ausmelt

and Pyro smelters.

 The commissioning of a 100ktpa lead smelter at Dariba has been delayed and is

expected to be complete in 4QFY11.

 The Sindesar Kurd mine, along with a 1.5mtpa mill, commenced trial runs at the end

of December 2010. Silver production capacity is expected to be expanded to 500tons

by the end of FY12.

 The acquisition of Anglo's Skorpion mine was completed in December 2010. Skorpion

produced 13.2k tons of refined zinc and reported EBITDA of Rs620m in December.

The acquisition process of other two mines of Anglo (Lisheen and Black Mountain) is

also expected to be completed in next few months.

SKORPION: Expect FY12 EBITDA at ~US$180m

 Skorpion, an open-cast mine in Namibia, has reserves of 8.3mt with an average grade

of 11.3% and mine life of 6-7 years. Cash cost of production is ~US$950/ton.

 Skorpion is developing the Gergarub zinc mine, which has reserves of 10mt. This

project is in its initial stages, which can provide upside to the acquisition over the

period of time.

Copper: EBIT up 23% QoQ due to strong LME, operating efficiency
 Copper cathode production grew 17% QoQ to 78,990 tons despite a temporary shutdown
following a Madras High Court order in September 2010. In 2QFY11 Sterlite had
undertaken maintenance shutdown for 22 days.
 Copper segment EBIT grew 23% QoQ to Rs1.9b (against our estimate of Rs2.6b)
due to strong copper product prices and better operational efficiency.

 The net cost of copper production was lower at 1.24 USc/lb (against 7.27 USc/lb in
2QFY11) due to strong LME copper and slime prices.
 Sulphuric acid realization was up 2% QoQ at Rs3,344/ton and copper slime prices
increased 4x sequentially to Rs116,953/ton.
 Mined metal production at CMT Australia was lower at 4,000 tons due to a temporary
dip in mine production.
Aluminum: below estimate on higher input costs; 300MW CPP to be
commissioned in April
 Balco's 3QFY11 aluminum production was flat QoQ at 65,459 tons and cost of
production increased 3% QoQ to US$1,795 largely due to the appreciation of the
rupee. Alumina procurement costs would have increased due to rising spot alumina
prices.
 Balco's call option arbitration award is expected in 4QFY11.
 Work on construction of Balco's 1,200MW CPP is progressing well, with first unit of
300MW to be commissioned in April 2011. First metal tapping from a 325ktpa aluminum
smelter at Balco is temporarily deferred and hence production from the entire 1,200MW
power plant will be available for merchant sales.
 Balco's coal block is expected to open in six months, which will reduce costs significantly.
 VAL's aluminum production increased 6% QoQ to 103,000 tons. VAL posted losses
(Rs1b) due to interest and depreciation charges. The cost of alumina production is
high at US$320/ton in the absence of captive bauxite.
 Out of a committed US$8b of capex at VAL, the company has spent ~US$6b so far.
The rest of the capex of US$1.2b is expected to be made in six months as the
management awaits clarity on allocation of a captive bauxite mine. First metal tapping
from 1.25mtpa smelter has been deferred.

Energy: realization down 21% QoQ at Rs2.72/kwh
 Revenue from the power business declined 19% QoQ to Rs1.3b as realization fell
sharply by 21% QoQ to Rs2.72/kwh and volumes grew 10% to 454m units.

 Sterlite Energy's (SEL) second unit of 2,400MW (4x600MW) was synchronized in
December 2010. SEL sold 245m units as a trial run as it has not capitalized units in this
quarter. The company expects stabilization of the first unit of 600MW in 4QFY11.
EPS cut due to delay in commissioning of power units; Skorpion acquisition
to add Rs16 to SOTP; maintain Buy
 Skorpion's zinc assets were acquired from Anglo in December 2010. Consequently,
cash balance fell from Rs247b at the end of 2QFY11 to Rs208b at the end of 3QFY11.
 We are incorporating earnings from Skorpion in our 4QFY11, FY12 and FY13 estimates.
We expect Skorpion to contribute Rs8.5b and Rs4.5b to EBITDA and PAT respectively
in FY12 at our zinc price assumption of US$2,200/ton.
 Although two units of 600MW each at Sterlite Energy are operational, there has been
a delay of nearly six months in announcing commercial generation due to delay in
plant stabilization. Besides, there are bottlenecks in transporting coal from the mines
to the site.
 FY11 and FY12 EPS have been cut by 5% and 3% to Rs12.8 and Rs21.4, respectively,
after factoring in (1) the contribution from the Skorpion mine acquisition and (2) slippage
in Sterlite Energy's power unit.
 The stock trades at FY12E P/E of 8.4x and EV/EBITDA of 5.4x. We value the stock
at Rs221 based on STOP. We are positive on the stock as both the zinc and energy
businesses have potential to drive stronger earnings than estimates. Maintain Buy.

Company description
Sterlite is a diversified play on three base metals. It is ramping
up capacities to 1mtpa of refined zinc and lead, which will
fuel significant volume growth. The company is setting up
a 2,400MW power project in Orissa and the second 600MW
phase was synchronized in December 2010. The project is
in close proximity to coal mines and Sterlite will soon replace
coal linkages with coal from captive mines. Given its low
cost production and strong demand, the project will drive
up earnings. Sterlite plans expansion in the aluminum
business through its 51% stake in Balco and 29.5% stake
in Vedanta Aluminium (VAL). Sterlite had cash of Rs208b
across the group as at December 2010.
Key investment arguments
 Sterlite earnings are likely to be driven by volume growth
in the zinc and aluminum business. Zinc capacity
expanded by 200ktpa to 869ktpa recently, which will
drive production of refined metal in FY11 and FY12.
Another 100ktpa lead smelter is expected to be
commissioned in FY11, which will take zinc and lead
capacity to 1.06mtpa.
 Sterlite's exercise of call options on Hindustan Zinc and
Balco will be value accretive to shareholders.
 Sterlite Energy will start power generation in 2HFY11
leading to a quantum jump in profits because of low
cost of production and lucrative power rates.
Key investment risks
 An unexpected fall in zinc or aluminum prices may
adversely impact profitability.
 Delay in getting approvals for mining bauxite may
hamper growth in earnings.
Recent developments
 The arbitration panel hearing the matter of the exercise
by Sterlite of its call option to buy 49% stake in Balco
ruled against the company.
Valuation and view
 The stock trades at a P/E of 8.4x FY12E and EV/
EBITDA of 5.4x FY12E. Maintain Buy.
Sector view
 Base metal prices have kept increasing over the past
3-4 months due to expectation of improved demand from
developed nations, strong demand from China and rising
input costs. Rising energy costs are increasing costs of
production of marginal players, which supports higher
LME prices. ICSG expects the world copper market
to show a deficit of 400k tons as increased economic
activity will boost demand faster than growth of refined
production. An additional quantitative easing
implemented in developed markets to maintain slow
recovery will support higher base metal prices in the
medium term.