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Sterlite Industries
Overweight
STRL.BO, STLT IN
Coming out of a 'Perfect Storm', better times ahead? We believe so
• FY11, a year of disappointments for STLT...: Operational issues (zinc
segment impacted by acute water crisis), regulatory issues (non approval of
bauxite mine, copper smelter court case, alumina refinery expansion not
approved, BALCO arbitration against STLT, Anglo Zinc acquisition not being
done via HZL), teething problems with the 2400MW power project (instead
of earlier expectation 2 units entering into commercial production by end
March-11, we now expect only 1 unit to flow into P&L in FY11) and continued
investor fears of STLT’s cash support to associate VAL being higher than its
stake of 29.5%, have all contributed to the massive underperformance in 2010
(STLT -14% v/s +18% for NIFTY and +54% for HNDL). We do not view the
arbitration panel judgment as very negative for STLT.
• …Operationally, zinc improvement, power project stabilization over next 4
qrtrs to continue aiding earnings growth: We expect refined zinc production
to pick up current levels of 178KT/qrtr to +200KT/qrtr as the water problems
are now resolved. The Anglo zinc assets acquisition should start flowing
through (Skorpion mine EBITDA at $14mn at 13KT prod for Dec-10) with the
remaining 2 mines’ potential acquisition over the next 2 qrtr likely. We estimate
an EBITDA of $383mn from all 3 mines in FY12. The power project
stabilization, which admittedly has been delayed significantly, should also start
contributing from the Sept qrtr as by then 2 units of 600MW each should have
started commercial production.
• Coal an increasingly big headache for STLT, not much improvement
expected in aluminum: We have been surprised by STLT’s lack of focus on
coal acquisitions, given our view that domestic coal availability is only going to
become tighter and STLT growth projects in power could be increasingly short
of coal. A large part of the analyst conf call was devoted to coal issues. In this
regard, we believe captive coal mine development in BALCO would be critical.
We do not expect any material improvement in the aluminum segment given a)
bauxite sourcing issues, and b) surge in imported alumina prices.
• Maintain OW, increase PT to Rs225: We value STLT on 6x FY13E
EV/EBITDA and revise our March-12 PT to Rs225 (Rs205 earlier), implying
25% upside from current levels. Key risks are a) continued delays in ramp up of
power capacities; b) non receipt of linkage coal and c) sharp correction in Zn.
Update on key issues
Power projects: STLT is in the process of stabilization of the 2nd unit of 600MW
and expects the 1st unit to start flowing through the P&L in the current quarter. The
1st unit had a trial production of 245mn units in the Dec quarter. Regarding
BALCO's 1200MW power plant (300 X 4), STLT said work is on track, and expects
to deliver the 1st unit of 300MW in one quarter's time. Regarding coal sourcing,
management expects linkage coal delivery to be in sync with requirements, though
there would be need of open market purchases.
JPM view: We expect the 1st of 600MW to partially flow through the P&L in the
March quarter and fully in the June quarter, and the 2nd unit of 600MW to flow
through in the Sept quarter. We expect coal costs for the company to remain
elevated, given our view that Coal India is likely to face continued coal
production/evacuation issues and hence STLT's coal costs for the power projects is
likely to spike up.
Zinc, Anglo Zinc acquisition: STLT expects zinc production to pick up as the water
issues are now resolved. The Skorpion mine contributed $13mn to EBITDA in the
Dec month. We expect refined zinc production to hit +200KT from current levels of
178KT and expect the remaining 2 Anglo Zinc acquisitions to also be completed
over the next 2 quarters.
Aluminum likely to remain weak given bauxite, alumina issues: With Lanjigarh
not producing at rated capacity given bauxite sourcing issues, aluminum CoP is
likely to remain at elevated levels across BALCO and VAL.
Regulatory update- BALCO arbitration panel rules in favor of Govt: The
BALCO arbitration panel, late last night, has ruled in favor of the Govt. We believe
this would also apply to Hindustan Zinc call option. While we were not building in
any upside on this front, sentiment wise it is negative for STLT and likely could
result in a re-start of the legal process.
Investment view- Remain OW, would use weakness to build
position
We remain OW on the stock with a revised PT of Rs225 based on 6x FY13E
EV/EBITDA We reduce our multiple to 6x from 6.3x to account for STLT increasing
coal exposure, as we expect STLT to potentially have to source more coal from the
open market. We cut our FY11E estimates by 17%, but maintain our FY12E
estimates. Key risks are a) continued delays in ramp up of power capacities; b) non
receipt of linkage coal and c) sharp correction in Zn.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries
Overweight
STRL.BO, STLT IN
Coming out of a 'Perfect Storm', better times ahead? We believe so
• FY11, a year of disappointments for STLT...: Operational issues (zinc
segment impacted by acute water crisis), regulatory issues (non approval of
bauxite mine, copper smelter court case, alumina refinery expansion not
approved, BALCO arbitration against STLT, Anglo Zinc acquisition not being
done via HZL), teething problems with the 2400MW power project (instead
of earlier expectation 2 units entering into commercial production by end
March-11, we now expect only 1 unit to flow into P&L in FY11) and continued
investor fears of STLT’s cash support to associate VAL being higher than its
stake of 29.5%, have all contributed to the massive underperformance in 2010
(STLT -14% v/s +18% for NIFTY and +54% for HNDL). We do not view the
arbitration panel judgment as very negative for STLT.
• …Operationally, zinc improvement, power project stabilization over next 4
qrtrs to continue aiding earnings growth: We expect refined zinc production
to pick up current levels of 178KT/qrtr to +200KT/qrtr as the water problems
are now resolved. The Anglo zinc assets acquisition should start flowing
through (Skorpion mine EBITDA at $14mn at 13KT prod for Dec-10) with the
remaining 2 mines’ potential acquisition over the next 2 qrtr likely. We estimate
an EBITDA of $383mn from all 3 mines in FY12. The power project
stabilization, which admittedly has been delayed significantly, should also start
contributing from the Sept qrtr as by then 2 units of 600MW each should have
started commercial production.
• Coal an increasingly big headache for STLT, not much improvement
expected in aluminum: We have been surprised by STLT’s lack of focus on
coal acquisitions, given our view that domestic coal availability is only going to
become tighter and STLT growth projects in power could be increasingly short
of coal. A large part of the analyst conf call was devoted to coal issues. In this
regard, we believe captive coal mine development in BALCO would be critical.
We do not expect any material improvement in the aluminum segment given a)
bauxite sourcing issues, and b) surge in imported alumina prices.
• Maintain OW, increase PT to Rs225: We value STLT on 6x FY13E
EV/EBITDA and revise our March-12 PT to Rs225 (Rs205 earlier), implying
25% upside from current levels. Key risks are a) continued delays in ramp up of
power capacities; b) non receipt of linkage coal and c) sharp correction in Zn.
Update on key issues
Power projects: STLT is in the process of stabilization of the 2nd unit of 600MW
and expects the 1st unit to start flowing through the P&L in the current quarter. The
1st unit had a trial production of 245mn units in the Dec quarter. Regarding
BALCO's 1200MW power plant (300 X 4), STLT said work is on track, and expects
to deliver the 1st unit of 300MW in one quarter's time. Regarding coal sourcing,
management expects linkage coal delivery to be in sync with requirements, though
there would be need of open market purchases.
JPM view: We expect the 1st of 600MW to partially flow through the P&L in the
March quarter and fully in the June quarter, and the 2nd unit of 600MW to flow
through in the Sept quarter. We expect coal costs for the company to remain
elevated, given our view that Coal India is likely to face continued coal
production/evacuation issues and hence STLT's coal costs for the power projects is
likely to spike up.
Zinc, Anglo Zinc acquisition: STLT expects zinc production to pick up as the water
issues are now resolved. The Skorpion mine contributed $13mn to EBITDA in the
Dec month. We expect refined zinc production to hit +200KT from current levels of
178KT and expect the remaining 2 Anglo Zinc acquisitions to also be completed
over the next 2 quarters.
Aluminum likely to remain weak given bauxite, alumina issues: With Lanjigarh
not producing at rated capacity given bauxite sourcing issues, aluminum CoP is
likely to remain at elevated levels across BALCO and VAL.
Regulatory update- BALCO arbitration panel rules in favor of Govt: The
BALCO arbitration panel, late last night, has ruled in favor of the Govt. We believe
this would also apply to Hindustan Zinc call option. While we were not building in
any upside on this front, sentiment wise it is negative for STLT and likely could
result in a re-start of the legal process.
Investment view- Remain OW, would use weakness to build
position
We remain OW on the stock with a revised PT of Rs225 based on 6x FY13E
EV/EBITDA We reduce our multiple to 6x from 6.3x to account for STLT increasing
coal exposure, as we expect STLT to potentially have to source more coal from the
open market. We cut our FY11E estimates by 17%, but maintain our FY12E
estimates. Key risks are a) continued delays in ramp up of power capacities; b) non
receipt of linkage coal and c) sharp correction in Zn.
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