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Sterlite Industries
Wish you were here
4QFY11 earnings beat our expectations by a wide margin. We raise our FY12/13F
earnings 16% and 15%, respectively, to factor in higher commodity prices.
However, we believe the key to future stock performance remains resolution of
the Niyamgiri mines, in which (VAL) Rs25/share has been invested.
4QFY11 earnings beat expectations by a wide margin; Sterlite now 80% zinc
Sterlite handsomely beat our expectations, driven by a robust performance at its India and
Anglo-American Zinc businesses. The proportion of zinc earnings to EBIT has increased
from 75% to 80% on a yoy basis. Earnings from the copper smelting business (11% of EBIT)
have also risen sharply due to better byproduct realisations. Aluminium business EBIT also
has risen 19% yoy, driven by realisations rising more quickly than costs.
Core Niyamgiri issues remain
Management has improved disclosure levels and provided several details such as
investments in Vedanta Aluminium Ltd (VAL) and the earnings from VAL etc. VAL made
EBITDA of Rs2.5bn in 4QFY11 and Rs7.2bn for FY11; however, on a PAT level, it incurred a
loss of Rs2.7bn in 4QFY11 and Rs9.7bn in FY11, of which Sterlite’s share is 29.5%. Working
backwards, EBITDA would have to increase Rs9.7bn to come to breakeven and can happen
only the back of higher volumes and better integration. Hence we believe early resolution of
Niyamgiri is crucial. Sterlite has so far contributed Rs86.2bn to VAL in the form of equity and
loans (which we treat as equity), amounting to Rs25/share for Sterlite.
Valuations remain inexpensive, in our view; raising TP to Rs210 (from Rs207)
The zinc business, with its excellent performance, now forms the bulk of the valuation for
Sterlite and contributed 77% of FY11 EBIT. However, this does not help the valuation much,
as zinc companies trade relatively cheaply. We believe the next round of re-rating could
emerge after resolution of the Niyamgiri bauxite mine issue, which could add an incremental
Rs32/share to Sterlite’s valuation alone and diversify the earnings stream, which is
increasingly overexposed to the vagaries of zinc prices. We raise our FY12F/FY13F earnings
16%/15% and our SOTP-based TP from Rs207 to Rs210. Zinc now forms 80% of EBIT, but
just 64% of the SoTP valuation owing to low valuations for zinc businesses globally. We
hence see STLT primarily as a zinc business. Maintain Buy.
Why we wish Niyamgiri was here
About Rs285bn has been spent so far in VAL, which made EBITDA of Rs7.2bn and a net
loss of Rs9.7bn in FY11 and we believe has no real prospects of improving performance in
the near term unless the Niyamgiri bauxite mine issue is resolved.
Sterlite owns 29.5% of VAL, which has two smelters of 0.5mt and 1.25mt. The 1.25mt smelter is
lying idle for want of raw materials. The Niyamgiri mines, which were earlier cleared by the
Supreme Court, was cancelled by the Ministry of Environment and Forest, against which the
Orissa government has now filed an appeal with the Supreme Court. Hence, the project is now
stuck and the investment in VAL has yet to bear fruit.
We estimate that in future, if the Niyamgiri bauxite mine were to be allocated to VAL, VAL could
make alumina at a cost of less than US$200/t and aluminium at a cost of less than US$1500/t.
Assuming a selling price of US$2,500t for aluminium and operating at 90% capacity, VAL could
generate EBITDA of US$1.6bn (US$0.48bn Sterlite’s share), which could add an incremental
Rs32/share to our valuation of Sterlite.
Revised model estimates; raise TP to Rs210
We have raised our commodity prices assumptions for FY12/13 based on the continued strength
in prices as well as the revision in forecasts by our commodities team. We raise our aluminium
price assumption for FY12/13 by 11%/12% to US$2,486/tonne and US$2,607/tonne, respectively.
We raise our copper price estimates 21%/23%, to US$8,938/tonne and US$9,506/tonne,
respectively. With silver at 31-year highs (spot at US$46/oz), we increase our silver price
estimates to US$33/oz for FY12/13. We also increase sulphuric acid realisations 18% for
FY12/13. As a result of the changes, our earnings estimates for FY12/13 are now 16%/15%
higher.
We value Sterlite using the SOTP approach. With 80% of earnings contribution coming from the
zinc business, we see Sterlite primarily as a zinc business for now, until power capacity scales up
and if and when the Niyamgiri ban is resolved. With zinc businesses trading at lower multiples
globally (current peer average of 5.9x CY11/FY12F EBITDA on Bloomberg consensus estimates),
we now value the base metals at 5.9x FY12F EV/EBITDA. We value Sterlite’s stake in Vedanta
Aluminium at a 50% discount to its equity and quasi equity/debt investment (total investment is
Rs86bn). We now value Hindustan Zinc’s silver business separately at 10x FY12F EV/EBITDA
(silver companies’ peer average). We value the 2400MW Sterlite energy business using the DCF
approach. We arrive at a new SOTP-based target price of Rs210 (from Rs207). Maintain Buy
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries
Wish you were here
4QFY11 earnings beat our expectations by a wide margin. We raise our FY12/13F
earnings 16% and 15%, respectively, to factor in higher commodity prices.
However, we believe the key to future stock performance remains resolution of
the Niyamgiri mines, in which (VAL) Rs25/share has been invested.
4QFY11 earnings beat expectations by a wide margin; Sterlite now 80% zinc
Sterlite handsomely beat our expectations, driven by a robust performance at its India and
Anglo-American Zinc businesses. The proportion of zinc earnings to EBIT has increased
from 75% to 80% on a yoy basis. Earnings from the copper smelting business (11% of EBIT)
have also risen sharply due to better byproduct realisations. Aluminium business EBIT also
has risen 19% yoy, driven by realisations rising more quickly than costs.
Core Niyamgiri issues remain
Management has improved disclosure levels and provided several details such as
investments in Vedanta Aluminium Ltd (VAL) and the earnings from VAL etc. VAL made
EBITDA of Rs2.5bn in 4QFY11 and Rs7.2bn for FY11; however, on a PAT level, it incurred a
loss of Rs2.7bn in 4QFY11 and Rs9.7bn in FY11, of which Sterlite’s share is 29.5%. Working
backwards, EBITDA would have to increase Rs9.7bn to come to breakeven and can happen
only the back of higher volumes and better integration. Hence we believe early resolution of
Niyamgiri is crucial. Sterlite has so far contributed Rs86.2bn to VAL in the form of equity and
loans (which we treat as equity), amounting to Rs25/share for Sterlite.
Valuations remain inexpensive, in our view; raising TP to Rs210 (from Rs207)
The zinc business, with its excellent performance, now forms the bulk of the valuation for
Sterlite and contributed 77% of FY11 EBIT. However, this does not help the valuation much,
as zinc companies trade relatively cheaply. We believe the next round of re-rating could
emerge after resolution of the Niyamgiri bauxite mine issue, which could add an incremental
Rs32/share to Sterlite’s valuation alone and diversify the earnings stream, which is
increasingly overexposed to the vagaries of zinc prices. We raise our FY12F/FY13F earnings
16%/15% and our SOTP-based TP from Rs207 to Rs210. Zinc now forms 80% of EBIT, but
just 64% of the SoTP valuation owing to low valuations for zinc businesses globally. We
hence see STLT primarily as a zinc business. Maintain Buy.
Why we wish Niyamgiri was here
About Rs285bn has been spent so far in VAL, which made EBITDA of Rs7.2bn and a net
loss of Rs9.7bn in FY11 and we believe has no real prospects of improving performance in
the near term unless the Niyamgiri bauxite mine issue is resolved.
Sterlite owns 29.5% of VAL, which has two smelters of 0.5mt and 1.25mt. The 1.25mt smelter is
lying idle for want of raw materials. The Niyamgiri mines, which were earlier cleared by the
Supreme Court, was cancelled by the Ministry of Environment and Forest, against which the
Orissa government has now filed an appeal with the Supreme Court. Hence, the project is now
stuck and the investment in VAL has yet to bear fruit.
We estimate that in future, if the Niyamgiri bauxite mine were to be allocated to VAL, VAL could
make alumina at a cost of less than US$200/t and aluminium at a cost of less than US$1500/t.
Assuming a selling price of US$2,500t for aluminium and operating at 90% capacity, VAL could
generate EBITDA of US$1.6bn (US$0.48bn Sterlite’s share), which could add an incremental
Rs32/share to our valuation of Sterlite.
Revised model estimates; raise TP to Rs210
We have raised our commodity prices assumptions for FY12/13 based on the continued strength
in prices as well as the revision in forecasts by our commodities team. We raise our aluminium
price assumption for FY12/13 by 11%/12% to US$2,486/tonne and US$2,607/tonne, respectively.
We raise our copper price estimates 21%/23%, to US$8,938/tonne and US$9,506/tonne,
respectively. With silver at 31-year highs (spot at US$46/oz), we increase our silver price
estimates to US$33/oz for FY12/13. We also increase sulphuric acid realisations 18% for
FY12/13. As a result of the changes, our earnings estimates for FY12/13 are now 16%/15%
higher.
We value Sterlite using the SOTP approach. With 80% of earnings contribution coming from the
zinc business, we see Sterlite primarily as a zinc business for now, until power capacity scales up
and if and when the Niyamgiri ban is resolved. With zinc businesses trading at lower multiples
globally (current peer average of 5.9x CY11/FY12F EBITDA on Bloomberg consensus estimates),
we now value the base metals at 5.9x FY12F EV/EBITDA. We value Sterlite’s stake in Vedanta
Aluminium at a 50% discount to its equity and quasi equity/debt investment (total investment is
Rs86bn). We now value Hindustan Zinc’s silver business separately at 10x FY12F EV/EBITDA
(silver companies’ peer average). We value the 2400MW Sterlite energy business using the DCF
approach. We arrive at a new SOTP-based target price of Rs210 (from Rs207). Maintain Buy
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