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Sterlite Industries: No Silver lining
Maintain REDUCE; Downside risk in aluminium/power business
Concerns on SEL/VAL continue; Balco CPP may see delays
Clarity on HZ's silver ramp-up; Costs unlikely to decline
No upside from Anglo Zinc; Co structure gets more complex
Maintain REDUCE
We maintain our REDUCE call on Sterlite Industries (STLT) with a new SoTP-based
target price of INR143.00. We continue to see downside risk to earnings due to
delays and cost pressures in the power and aluminium business. Current spot
metal prices are below our assumptions and imply 11%/14%/8% downside to our
FY12E EBITDA/EPS/TP. Together with risk of STLT providing further cash
support to VAL, this makes us view see risk-reward as unattractive.
Concerns on SEL continue
We see downside risk to our estimates for
Sterlite Energy (SEL) given project delays and rising coal costs.
Commissioning of the first two units of 4x600MW Jharsuguda project has
been delayed to 1QFY12 due to lack of evacuation capacity. Timely
commissioning of the last two units is also contingent on completion of a
new 1,000MW transmission line. SEL expects to source its coal through
linkage (65%), e-auction (25-30%) and imports (5-10%).
No improvement at VAL; Balco CPP may see delays
Vedanta Aluminium’s (VAL) costs remain high due to rising alumina and
coal costs (only 35% coal linkages). It has already incurred 80% capex
for the Phase-2 expansion. Hence, despite VAL’s USD150/tonne cost
reduction target, we still see a risk of it requiring cash support from STLT.
We also see risk of delays/higher costs in Balco’s 3x400MW captive
power plant (CPP) due to coal availability issues.
Clarity on HZ’s silver ramp-up; cost pressures persist
We are now incrementally positive on Hindustan Zinc’s (HZ IN) silver
production growth with SK mine ramp-up. However, we expect cost
pressures to continue, given still high stripping ratio at Rampura Agucha
(RA), rising share of production from underground/lower-grade mines and
costs for likely start-up of initial work on the underground mining at RA.
No upside from Anglo Zinc; structure more complex
We now factor in earnings contribution from erstwhile Anglo Zinc mines
from 4QFY11. This, combined with higher silver production at HZ and
1-23% higher metal price assumptions results in a 10-27% rise in our
FY11-13 EPS estimates. We however do not see any value accretion
from overseas zinc assets, given short mine life and low visibility on
development of the Gamsberg deposit. We also see this acquisition
adding further complexity to an already complex holding structure of
STLT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries: No Silver lining
Maintain REDUCE; Downside risk in aluminium/power business
Concerns on SEL/VAL continue; Balco CPP may see delays
Clarity on HZ's silver ramp-up; Costs unlikely to decline
No upside from Anglo Zinc; Co structure gets more complex
Maintain REDUCE
We maintain our REDUCE call on Sterlite Industries (STLT) with a new SoTP-based
target price of INR143.00. We continue to see downside risk to earnings due to
delays and cost pressures in the power and aluminium business. Current spot
metal prices are below our assumptions and imply 11%/14%/8% downside to our
FY12E EBITDA/EPS/TP. Together with risk of STLT providing further cash
support to VAL, this makes us view see risk-reward as unattractive.
Concerns on SEL continue
We see downside risk to our estimates for
Sterlite Energy (SEL) given project delays and rising coal costs.
Commissioning of the first two units of 4x600MW Jharsuguda project has
been delayed to 1QFY12 due to lack of evacuation capacity. Timely
commissioning of the last two units is also contingent on completion of a
new 1,000MW transmission line. SEL expects to source its coal through
linkage (65%), e-auction (25-30%) and imports (5-10%).
No improvement at VAL; Balco CPP may see delays
Vedanta Aluminium’s (VAL) costs remain high due to rising alumina and
coal costs (only 35% coal linkages). It has already incurred 80% capex
for the Phase-2 expansion. Hence, despite VAL’s USD150/tonne cost
reduction target, we still see a risk of it requiring cash support from STLT.
We also see risk of delays/higher costs in Balco’s 3x400MW captive
power plant (CPP) due to coal availability issues.
Clarity on HZ’s silver ramp-up; cost pressures persist
We are now incrementally positive on Hindustan Zinc’s (HZ IN) silver
production growth with SK mine ramp-up. However, we expect cost
pressures to continue, given still high stripping ratio at Rampura Agucha
(RA), rising share of production from underground/lower-grade mines and
costs for likely start-up of initial work on the underground mining at RA.
No upside from Anglo Zinc; structure more complex
We now factor in earnings contribution from erstwhile Anglo Zinc mines
from 4QFY11. This, combined with higher silver production at HZ and
1-23% higher metal price assumptions results in a 10-27% rise in our
FY11-13 EPS estimates. We however do not see any value accretion
from overseas zinc assets, given short mine life and low visibility on
development of the Gamsberg deposit. We also see this acquisition
adding further complexity to an already complex holding structure of
STLT.
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