Macquarie Research:: Buy Sterlite Industries- Growth to overshadow other concerns

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Sterlite Industries- Growth to overshadow other concerns
Event
 On track for growth: Sterlite reported strong 3Q results and has achieved
72% of our full year estimate in 9M FY11. We believe that continued strength
in commodity prices and growth in capacities will help deliver 40% growth in
earnings in FY12. Maintain Outperform and TP.

Impact
 Strong results for 3QFY11: Net sales at Rs82.9bn up 23% YoY, due to
strong results in copper, aluminium and zinc division, slightly offset by decline
in power prices. EBITDA at Rs19.4bn up 10% YoY & 32% QoQ, buoyed by
strong commodity prices. PAT at Rs11.0bn up 51% YoY & 9% QoQ.
 Zinc business – main driver of earnings: It contributed 76% to EBITDA in
the 3QFY11. Although we do not see much upside in zinc prices from current
levels, we expect commissioning of 1.5mtpa mill at Sindeshar Khurd and
completion of acquisition of Skorpion mines to increase FY12 EPS by 40%.
 Aluminium business – high aluminium prices helping: It contributed 8% to
EBITDA in the 3Q with high aluminium prices benefit partially offset by higher
alumina cost. We believe that aluminium prices will remain strong in the
medium term and expect a 20% increase EBITDA in FY12.
 Copper business – Tc/Rc recovery expected: This business has
contributed 12% to total EBITDA in 3Q. We expect a 20% improvement in
TC/Rc’s to Usc15.5/lb in FY12 to help increase earnings by 18% in FY12.
 Power business – new driver: This business remains relatively small and
contributed only 3% in 3Q. However, commissioning of 2400MW in SEL and
1200MW in Balco should make it a 25%+ contributor to Sterlite’s EBITDA.
 Balco’s arbitration – It appears that an arbitration panel comprised of 2 Chief
Justices of India has rejected Balco’s stake sale agreement, citing the call
option invalid. As per our understanding, an appeal against this judgement will
be limited, which will have an implication for the stake purchase of Hindustan
Zinc.While investor and street expectations were low and no one was building
a positive resolution, this news can be sentimentally negative. However, we
believe this closes a chapter and the company can now move ahead.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs216.00 based on a Sum of Parts methodology.
 Catalyst: Commissioning and commercialising of power projects.

Action and recommendation
 Maintain Outperform: We believe that Sterlite is well on track to double its
earnings in the next  three years and is trading at 9.1x PER FY12E earnings,
a significant discount to its peers. Maintain Outperform.