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Sterlite Industries (India) (STRL.BO)
Cheaper Than Challenges Justify
Maintain Buy — Sterlite offers exposure to non-ferrous metals and power. We
maintain Buy (1M) as: (1) the outlook for aluminium/copper appears positive and for
zinc stable (HZL has low costs); Sterlite offers strong power sales growth; (2) the stock
has risen 8% in the past month but has fallen 5% over the past 6 months due to
environmental issues, delays and minority acquisition setback, but much of the bad
news is likely factored in; and (3) the stock offers value at 7.2x FY12 PE, and is at a
discount to replacement cost.
Earnings reduced/TP slightly higher — We cut our attributable PAT by 2-10% for
FY11-13 taking a 1-8% hike in LME prices & higher FX rates. This is more than offset
by higher coal costs, lower sales of power and lead (project delays) and lower PLF (for
power). Despite the 2% PAT cut for FY12, our TP rises marginally to Rs218 (from
Rs215). There is an increase in FY12 SOTP value of the non-power businesses, which
is largely nullified by a fall in value of power businesses (for which we use DCF). Our
SOTP values HZL at 10x (18-month trading average) and other metal assets at 8x P/E.
At our target price, Sterlite would trade at 9.2x FY12 PE and 4.3x EV/EBITDA.
Reasonable business outlook — (1) Copper gains from a better TC/RC outlook (vs.
FY11); (2) Aluminium from robust prices/power sales; (3) Zinc from volume growth,
silver volumes/prices; (4) Power business from higher volumes.
Diversified portfolio — HZL (52% of FY12 PAT) gains from 4-16% zinc+lead volume
growth in FY12-13, silver sales, $2.9bn net cash; Balco (4%) gains from surplus power
sales; Copper (21%) TC/RCs firming up, strong other income; Anglo Zinc expected to
contribute 12% of PAT; the group is developing ~5,000MW of power by FY14. VAL
aluminium capacity should stay at 500kt until bauxite is available.
Downside risks/sector preference — Lower prices, further volume delays, FX
movements, higher royalty rates. Pecking order: Copper, Aluminium, Zinc.
Valuation
We continue to value Sterlite using a sum-of-the-parts methodology.
Zinc valuation: For the zinc business (Hindustan Zinc in which Sterlite holds a
64.9% stake), we apply 10x FY12E earnings. The target multiple we use is in line
with HZL’s average multiple during the past 18 months. This translates into a
value of Rs124 per Sterlite share. While there are no direct global comparables,
our target multiple is at the low end of the 9-12x trading range of companies such
as Xstrata, Korea Zinc and Teck Resources – which have a presence in zinc.
Non-zinc valuation: We value the non-ferrous businesses using a 20% discount
to the global average of 10x CY11E P/E, and the power business is valued on
P/B (expected plants) and DCF (commissioned plants). The non-zinc value works
out to Rs94 per Sterlite share. We assume that the Sterlite holding in Balco will
remain at 51%.
Total valuation of Rs218/share: Combining the above components gives us a
target price of Rs218 per share of Sterlite. At our target price, the stock would
trade at an adjusted FY12E P/E of 9.2x and EV/EBITDA of 4.3x.
Figure . Sterlite — Valuation Based on SOTP
Sterlite's businesses Value
HZL (based on HZL's valuation @Rs152/share) (Rs bn) 415.9
Other businesses excl HZL using P/E and P/B (Rs bn) 316.2
Total (Rs bn) 732.0
No. of shares (m) 3,362
Target price per share (Rs) 218
Source: Citi Investment Research and Analysis
Sterlite Industries (India)
Company description
Sterlite is a non-ferrous metals major with a presence in aluminium, zinc, copper
and power. Sterlite’s standalone PAT will be driven by treatment and refining
charges (TC/RC) at its custom copper smelter (lowest cost quartile, capacity
400ktpa). Sterlite also gains due to its acquisition of Anglo’s zinc/lead assets. Its
aluminium exposure comes from its 51% stake in Bharat Aluminium Co (Balco) and
29.5% stake in Vedanta Aluminium (VAL). Balco's aluminium capacity will remain at
260ktpa as its 325ktpa expansion has been deferred due to lack of captive bauxite.
Surplus power sales will remain an important source of revenue/profits for Balco.
Balco which has 810MW of power (270MW is surplus), is going ahead with its plans
to raise capacity by 1,200MW by 4Q FY12. VAL has deferred its plan to hike
aluminium capacity to 1.75mtpa (from 500ktpa) and alumina capacity to 5mtpa
(from 1mtpa) due to lack of bauxite from Niyamgiri. Sterlite's zinc and lead revenues
come from its 64.9% holding in Hindustan Zinc Ltd (HZL). This is an integrated lowcost zinc producer, largely due to the low cost of mining ore at the Rampura Agucha
mine (75% of ore requirements). Zinc-lead capacity is currently 964,000 tpa and will
rise to 1.06mtpa by mid-2011 once its 100ktpa lead expansion is completed. HZL
should also be positively impacted by higher silver capacity (500tpa by end-FY12).
We have deferred the purchase of the minority government stake in Balco (49%)
and HZL (29.5%) until beyond-FY13 in our estimates.
Investment strategy
We rate Sterlite Buy/Medium Risk (1M) with a target price of Rs218 as we feel the
stock offers value and most of the bad news appears discounted at the current
price: (1) The stock trades at 7.2x FY12 PE and also at a discount to replacement
cost; (2) The outlook for its non-ferrous businesses is positive to stable, and it offers
increased exposure to the power sector than before; (3) The stock has fallen 5% in
the past six months and 18% in the past year. Sterlite is well-diversified and has low
costs of production in zinc and, copper and some parts of their power business.
Hindustan Zinc (HZL) is the biggest contributor to Sterlite's PAT (52% in FY12). HZL
has US$2.9bn of cash and should benefit from 4-16% volume growth in zinc-lead in
FY12-13E, higher levels of silver sales, even though zinc has the weakest relative
near-term fundamentals with a surplus of 250-400kt in 2011-12. Balco is expected
to contribute 4% of Sterlite's consolidated PAT driven by surplus power sales
(~1,700MW available by FY13 and until aluminium expansion is complete) and
robust aluminium prices – US$2,500-2,600/t through 2013. Aluminium is one of our
preferred metals and two key issues will determine the outlook: (1) The
sustainability of inventory financing; (2) Smelter output in China. In copper, we
expect TC/RC margins to be higher at around US19c/lb in FY12 relative to FY11
(11c/lb). Commercial production of the first phase of the power project by the Sterlite
Group has commenced and the group is developing ~5,000MW of power by FY14
(2,400MW by end-FY12).
Valuation
We value Sterlite using a sum-of-the-parts (SOTP) approach. For the zinc business
(HZL), we apply a P/E of 10x (its 18-month average) to FY12E earnings. This
translates into a value of Rs124 per Sterlite share. We value the non-ferrous
businesses using a 20% discount to the global average of 10x CY11E P/E, and the
power business is valued on P/B (expected plants) and DCF (commissioned
plants). The non-zinc value works out to Rs94 per Sterlite share, resulting in a target
price of Rs218. At our target price, the stock would trade at an FY12E P/E of 9.2x
and EV/EBITDA of 4.3x. Our valuation assumes that the acquisition of the minority
stake of Balco and HZL will be delayed beyond end-FY13.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Sterlite shares. We feel this is
appropriate based on the company's diversified business lines and low cost of
production in both zinc and copper. Downside risks that could cause the shares to
continue to trade below our target price include: (1) Weaker-than-expected
commodity prices or TC/RC margins; (2) Further setbacks in completion of capacity
(copper/power); (3) Lower capacity utilization than we assume; (4) Appreciation of
the rupee vs the US$; (5) Higher royalty rates.
Hindustan Zinc
(HZNC.BO; Rs143.20; 2L)
Valuation
We set our target price for HZL at Rs152, by applying a P/E of 10x to our estimate
of FY12 earnings. We use P/E as our preferred valuation parameter for HZL, as we
believe that stocks such as HZL are largely driven by commodity price trends. Our
target multiple is set in line with HZL's average multiple during the past 18 months,
which we think should sustain going forward. While there are no direct global
comparables, our target multiple is at the low end of the 9-12x trading range for
companies such as Xstrata, Korea Zinc and Teck Resources (using consensus
estimates) - which have a presence in zinc. At our TP, HZL would trade at a FY12E
EV/EBITDA of 5.4x.
Risks
We assign a Low Risk rating to Hindustan Zinc shares, based on the rating
suggested by our quantitative risk-rating system, which tracks 260-day historical
share price volatility. Upside risks that could cause the shares to continue to trade
above our target price include: (1) Higher-than-expected zinc, lead and silver prices;
(2) Rupee depreciation; (3) Higher volumes than we expect; (4) Increase in
zinc/lead import duty. Downside risks to our target price include: (1) Weakness in
prices of zinc, lead and silver; (2) Lower volumes in its product sales as estimated;
(3) Mine disruption at Rampura Agucha, on which HZL is largely dependent for low
cost ore; (4) Rupee appreciation; (5) Higher royalty rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (India) (STRL.BO)
Cheaper Than Challenges Justify
Maintain Buy — Sterlite offers exposure to non-ferrous metals and power. We
maintain Buy (1M) as: (1) the outlook for aluminium/copper appears positive and for
zinc stable (HZL has low costs); Sterlite offers strong power sales growth; (2) the stock
has risen 8% in the past month but has fallen 5% over the past 6 months due to
environmental issues, delays and minority acquisition setback, but much of the bad
news is likely factored in; and (3) the stock offers value at 7.2x FY12 PE, and is at a
discount to replacement cost.
Earnings reduced/TP slightly higher — We cut our attributable PAT by 2-10% for
FY11-13 taking a 1-8% hike in LME prices & higher FX rates. This is more than offset
by higher coal costs, lower sales of power and lead (project delays) and lower PLF (for
power). Despite the 2% PAT cut for FY12, our TP rises marginally to Rs218 (from
Rs215). There is an increase in FY12 SOTP value of the non-power businesses, which
is largely nullified by a fall in value of power businesses (for which we use DCF). Our
SOTP values HZL at 10x (18-month trading average) and other metal assets at 8x P/E.
At our target price, Sterlite would trade at 9.2x FY12 PE and 4.3x EV/EBITDA.
Reasonable business outlook — (1) Copper gains from a better TC/RC outlook (vs.
FY11); (2) Aluminium from robust prices/power sales; (3) Zinc from volume growth,
silver volumes/prices; (4) Power business from higher volumes.
Diversified portfolio — HZL (52% of FY12 PAT) gains from 4-16% zinc+lead volume
growth in FY12-13, silver sales, $2.9bn net cash; Balco (4%) gains from surplus power
sales; Copper (21%) TC/RCs firming up, strong other income; Anglo Zinc expected to
contribute 12% of PAT; the group is developing ~5,000MW of power by FY14. VAL
aluminium capacity should stay at 500kt until bauxite is available.
Downside risks/sector preference — Lower prices, further volume delays, FX
movements, higher royalty rates. Pecking order: Copper, Aluminium, Zinc.
Valuation
We continue to value Sterlite using a sum-of-the-parts methodology.
Zinc valuation: For the zinc business (Hindustan Zinc in which Sterlite holds a
64.9% stake), we apply 10x FY12E earnings. The target multiple we use is in line
with HZL’s average multiple during the past 18 months. This translates into a
value of Rs124 per Sterlite share. While there are no direct global comparables,
our target multiple is at the low end of the 9-12x trading range of companies such
as Xstrata, Korea Zinc and Teck Resources – which have a presence in zinc.
Non-zinc valuation: We value the non-ferrous businesses using a 20% discount
to the global average of 10x CY11E P/E, and the power business is valued on
P/B (expected plants) and DCF (commissioned plants). The non-zinc value works
out to Rs94 per Sterlite share. We assume that the Sterlite holding in Balco will
remain at 51%.
Total valuation of Rs218/share: Combining the above components gives us a
target price of Rs218 per share of Sterlite. At our target price, the stock would
trade at an adjusted FY12E P/E of 9.2x and EV/EBITDA of 4.3x.
Figure . Sterlite — Valuation Based on SOTP
Sterlite's businesses Value
HZL (based on HZL's valuation @Rs152/share) (Rs bn) 415.9
Other businesses excl HZL using P/E and P/B (Rs bn) 316.2
Total (Rs bn) 732.0
No. of shares (m) 3,362
Target price per share (Rs) 218
Source: Citi Investment Research and Analysis
Sterlite Industries (India)
Company description
Sterlite is a non-ferrous metals major with a presence in aluminium, zinc, copper
and power. Sterlite’s standalone PAT will be driven by treatment and refining
charges (TC/RC) at its custom copper smelter (lowest cost quartile, capacity
400ktpa). Sterlite also gains due to its acquisition of Anglo’s zinc/lead assets. Its
aluminium exposure comes from its 51% stake in Bharat Aluminium Co (Balco) and
29.5% stake in Vedanta Aluminium (VAL). Balco's aluminium capacity will remain at
260ktpa as its 325ktpa expansion has been deferred due to lack of captive bauxite.
Surplus power sales will remain an important source of revenue/profits for Balco.
Balco which has 810MW of power (270MW is surplus), is going ahead with its plans
to raise capacity by 1,200MW by 4Q FY12. VAL has deferred its plan to hike
aluminium capacity to 1.75mtpa (from 500ktpa) and alumina capacity to 5mtpa
(from 1mtpa) due to lack of bauxite from Niyamgiri. Sterlite's zinc and lead revenues
come from its 64.9% holding in Hindustan Zinc Ltd (HZL). This is an integrated lowcost zinc producer, largely due to the low cost of mining ore at the Rampura Agucha
mine (75% of ore requirements). Zinc-lead capacity is currently 964,000 tpa and will
rise to 1.06mtpa by mid-2011 once its 100ktpa lead expansion is completed. HZL
should also be positively impacted by higher silver capacity (500tpa by end-FY12).
We have deferred the purchase of the minority government stake in Balco (49%)
and HZL (29.5%) until beyond-FY13 in our estimates.
Investment strategy
We rate Sterlite Buy/Medium Risk (1M) with a target price of Rs218 as we feel the
stock offers value and most of the bad news appears discounted at the current
price: (1) The stock trades at 7.2x FY12 PE and also at a discount to replacement
cost; (2) The outlook for its non-ferrous businesses is positive to stable, and it offers
increased exposure to the power sector than before; (3) The stock has fallen 5% in
the past six months and 18% in the past year. Sterlite is well-diversified and has low
costs of production in zinc and, copper and some parts of their power business.
Hindustan Zinc (HZL) is the biggest contributor to Sterlite's PAT (52% in FY12). HZL
has US$2.9bn of cash and should benefit from 4-16% volume growth in zinc-lead in
FY12-13E, higher levels of silver sales, even though zinc has the weakest relative
near-term fundamentals with a surplus of 250-400kt in 2011-12. Balco is expected
to contribute 4% of Sterlite's consolidated PAT driven by surplus power sales
(~1,700MW available by FY13 and until aluminium expansion is complete) and
robust aluminium prices – US$2,500-2,600/t through 2013. Aluminium is one of our
preferred metals and two key issues will determine the outlook: (1) The
sustainability of inventory financing; (2) Smelter output in China. In copper, we
expect TC/RC margins to be higher at around US19c/lb in FY12 relative to FY11
(11c/lb). Commercial production of the first phase of the power project by the Sterlite
Group has commenced and the group is developing ~5,000MW of power by FY14
(2,400MW by end-FY12).
Valuation
We value Sterlite using a sum-of-the-parts (SOTP) approach. For the zinc business
(HZL), we apply a P/E of 10x (its 18-month average) to FY12E earnings. This
translates into a value of Rs124 per Sterlite share. We value the non-ferrous
businesses using a 20% discount to the global average of 10x CY11E P/E, and the
power business is valued on P/B (expected plants) and DCF (commissioned
plants). The non-zinc value works out to Rs94 per Sterlite share, resulting in a target
price of Rs218. At our target price, the stock would trade at an FY12E P/E of 9.2x
and EV/EBITDA of 4.3x. Our valuation assumes that the acquisition of the minority
stake of Balco and HZL will be delayed beyond end-FY13.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, suggests a Medium Risk rating for Sterlite shares. We feel this is
appropriate based on the company's diversified business lines and low cost of
production in both zinc and copper. Downside risks that could cause the shares to
continue to trade below our target price include: (1) Weaker-than-expected
commodity prices or TC/RC margins; (2) Further setbacks in completion of capacity
(copper/power); (3) Lower capacity utilization than we assume; (4) Appreciation of
the rupee vs the US$; (5) Higher royalty rates.
Hindustan Zinc
(HZNC.BO; Rs143.20; 2L)
Valuation
We set our target price for HZL at Rs152, by applying a P/E of 10x to our estimate
of FY12 earnings. We use P/E as our preferred valuation parameter for HZL, as we
believe that stocks such as HZL are largely driven by commodity price trends. Our
target multiple is set in line with HZL's average multiple during the past 18 months,
which we think should sustain going forward. While there are no direct global
comparables, our target multiple is at the low end of the 9-12x trading range for
companies such as Xstrata, Korea Zinc and Teck Resources (using consensus
estimates) - which have a presence in zinc. At our TP, HZL would trade at a FY12E
EV/EBITDA of 5.4x.
Risks
We assign a Low Risk rating to Hindustan Zinc shares, based on the rating
suggested by our quantitative risk-rating system, which tracks 260-day historical
share price volatility. Upside risks that could cause the shares to continue to trade
above our target price include: (1) Higher-than-expected zinc, lead and silver prices;
(2) Rupee depreciation; (3) Higher volumes than we expect; (4) Increase in
zinc/lead import duty. Downside risks to our target price include: (1) Weakness in
prices of zinc, lead and silver; (2) Lower volumes in its product sales as estimated;
(3) Mine disruption at Rampura Agucha, on which HZL is largely dependent for low
cost ore; (4) Rupee appreciation; (5) Higher royalty rates.
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