Sterlite Industries --Operationally sound:: Macquarie Research,

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Sterlite Industries
Operationally sound
Event
 Sterlite Industries India Limited is India's largest non-ferrous metals and
mining company and is one of the fastest-growing private sector companies.
Its principal operating companies comprise (1) Hindustan Zinc Limited (HZL)
for its fully integrated zinc and lead operations, (2) Sterlite Industries India
Limited (Sterlite) and Copper Mines of Tasmania Pty Limited (CMT) for their
copper operations in India/Australia, (3) Bharat Aluminium Company (BALCO)
for its aluminium and alumina operations and (4) Sterlite Energy for its
commercial power generation business.

Impact
 Earnings growth to continue: We expect Sterlite’s EBITDA to grow 80% in
FY12 to $2.8bn as commodity prices remain strong. Also, Sterlite’s balance
sheet remains strong, with reported net cash of US$3.4 billion as of mid-
FY11.
 Zinc business – main driver of earnings: The zinc business contributes about
76% to EBITDA. Although we do not see much upside in zinc prices from
current levels, we expect commissioning of a 1.5mtpa mill at Sindeshar Khurd
and completion of the acquisition of the Skorpion mines to increase FY12E EPS
by 40%.
 Aluminium business – high aluminium prices helping: The aluminium
business contributes 8% to EBITDA, although the high aluminium prices
benefit is partially offset by higher alumina costs. 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: The copper business has
historically contributed 12% to total EBITDA. 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 will make it a 25%+ contributor to Sterlite’s EBITDA.
Action and recommendation
 Earnings growth not accounted for: We believe Sterlite continues to offer
value with its strong, diverse growth pipeline, strong balance sheet and
numerous upcoming catalysts. We believe the company can see a significant
re-rating by the market once it can resolve its longstanding issues involving
the government.


Sterlite Industries Aide Memoire
Operational Issues
Hindustan Zinc operations
1. What are the resources? Do you plan to increase capacity beyond the 50% expansion of your operations? Will your head
zinc grade fall with the opening of new lower-quality mines in Sindeshwar Khurd?
2. When are you planning to start the captive coal mine? What other initiatives are you taking to reduce costs?
3. What is the rationale for buying the high-cost and low-life zinc mines of Anglo? Will you be able to get government
permission to buy them under Hindustan Zinc? Will you transfer the assets to Hindustan Zinc now that you have already
bought two mines under Sterlite?
4. How much silver did you produce from Sindershar Khurd last year, and what is your projection for the next few years?
Balco operations
1. What is the schedule of completion for the 325ktpa aluminium smelter, 1200MW power plant and 200mnt coal mine
development?
2. Will you have surplus power to sell to the grid? What funding is required from the Sterlite parent company?
Sterlite Energy
1. What is the status of the 2400MW power project? What is the reason for the delay in commissioning?
2. Have you got any coal under linkage from Coal India? How much coal do you now have stockpiled? What is the average
price?
3. What is the status of the 1980MW Talwendi Saboo project? Will you receive some power to sell in merchant from this
project?
Financial Issues
1. What plans do you have for the substantial US$6bn of cash on your books? In what areas are you looking for acquisitions?
Government and strategy-related issues
1. What is the next step you will take for the Balco stake after rejection by the arbitration panel? How will this decision impact
the Hindustan Zinc stake sale?
2. Why did the government not agree to the Hindustan Zinc stake sale within the stipulated time? What forced you to take the
arbitration route? What timeline do you expect here? Do you expect to keep HZ listed post the government stake
purchase?
3. Why is growth coming from the low-margin business? What is the growth plan for the next five years? From where is the
next leg of growth coming?