Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (STLT)
Metals & Mining
Strong growth ahead. FY2012E will mark a strong year for Sterlite led by (1) capacity
expansion at Hindustan Zinc, (2) increase in silver production thanks to expansion of
silver-rich Sindeshwar Khurd mine, and (3) commissioning of Jharsugda IPP. These
projects will drive EBITDA CAGR of 41% over the next two years. We have made a few
changes to our model including (1) consolidation of Anglo zinc assets, (2) coal price
increase for the power business, and (3) revised forecast for HZL. We raise our FY2012-
13E EPS by 1-2%. BUY retained with end-FY2012E target price of Rs200.
Multiple growth drivers for the next two years
We forecast strong EBITDA growth for Sterlite over the next two years as expansion projects finally
come on stream. Specifically, we forecast growth of 67.9% in FY2012E and 18.9% in FY2013E
and 48.1% and 21.8% on an organic basis. Catalysts that will support the growth include:
Capacity expansion at Hindustan Zinc. Our recent visit to HZ’s mine and smelter increased our
confidence on the timely commissioning of projects. HZ has already ramped up Sindeshwar
Khurd (SK) ore mining capacity to a monthly run rate of 1.2 mn tonnes. Commissioning of 100
ktpa lead smelter at Dariba smelting complex will be done soon. Post expansion, HZ will have
integrated zinc-lead capacity of 1.06 mn tonnes. Based on the progress, we have raised our
zinc-lead volumes estimates.
HZ management is confident of FY2012E exit capacity of 500 tonnes of silver and production of
400 tonnes from 180 tonnes in FY2011E. Silver is a co-product with the entire production cost
included in the zinc-lead COP; hence silver revenues will not have any cost attached to it.
Growth in production will be helped by ramp-up of silver-rich SK mine that has silver content of
188 ppm. We have increased silver production estimate by 35.9% for FY2012E to 285 tonnes.
Silver will contribute 8.4% and 10.2% to consolidated EBITDA in FY2012E and FY2013E,
respectively.
We expect capitalization of units I and 11 of Jharsugda IPP soon. Commissioning of 600 MW
transmission line to PGCIL in March 2011 will help evacuation of power and COD of unit II.
Power will contribute 37% to incremental EBITDA in FY2012E.
Maintain BUY; estimates revised, TP unchanged at Rs200
We have made a few changes to our estimates, which we elaborate on the subsequent pages.
Sterlite is trading at attractive 5.3X and 3.7X FY2012E and FY2013E attributable EBITDA. Our TP of
Rs200 is based on conservative assumptions and does not build in any equity value to VAL project,
loans extended by Sterlite to VAL and investments in the new 325 ktpa Balco aluminium smelter.
Target price of Rs200 unchanged but a few changes in assumptions
Our end-FY2012E TP of Rs200 remains unchanged; however, we have made a few changes
to our assumptions
We include acquisition of Anglo American’s zinc assets in our financials and valuation
model. We value the zinc international business at US$1.7 bn; higher than the acquisition
price of US$1.34 bn. Note that Sterlite’s acquisition of Anglo’s zinc assets is based on
long-term zinc price assumption of US$1,800/ ton, lower than our assumption. Zinc
international business contributes Rs27/share to our fair value of Sterlite.
Fungibility of cash and complete control on operations will be constrained at Balco and
HZ after adverse decisions by the arbitration panel that ruled in favor of the Government.
This implies that the Government is free to hold on to its stake in Balco or sell its stake to
any player it wishes. Note that Sterlite had bought 51% in Balco with the option to
acquire the balance 49% at a price fixed by an expert panel. The Government disputed
the validity of the call option that was executed in favor of Sterlite. HZ, in which Sterlite
owns 64.9%, also has a similar case. As a result of this change, we introduce holding
company discount of 15% in our valuation methodology (not included earlier; there was
hope of favorable outcome for Sterlite by the arbitration panel).
We eliminate negative value of Rs20/share factored in our valuation earlier pertaining to
funding of VAL. We now assume that Vedanta and Sterlite will provide debt to VAL in
proportion of equity holding rather than Sterlite providing entire excess funding. Note
that we do not value Rs65 bn of equity invested and loans extended by Sterlite to VAL.
Sterlite trades at inexpensive 8.3X FY2012E and 7.5X FY2013E earnings. Note that earnings
of Sterlite will be increasingly de-risked with power and silver contributing 38% to EBITDA
by end-FY2013E.
Changes to our earnings model
Exhibits 1, 2 and 3 summarize key changes to our earnings model. We elaborate some of
the changes in detail.
Hindustan zinc. We increase zinc-lead volume assumption by 5.6% to 943 ktpa for
FY2012E and 2.8% to 1,010 ktpa for FY2013E. We also increase our silver production
assumption by 12.6% and 35.9% to 285 tonnes and 403 tonnes for FY2012E and
FY2013E, respectively. These positives are offset by likely increase in cost of production
following recent increase in mining costs and power and fuel expenses. We increase gross
COP (before byproduct credits) to US$1,277 and US$1,359 for FY2012E and FY2013E,
respectively. We raise our EBITDA estimates by 4.7% and 4.1% for FY2012E and
FY2013E, respectively.
Anglo American zinc assets. We include Anglo American zinc assets in our model. We
forecast zinc-lead metal-in-concentrate sales of 456 kt in FY2012E. Sterlite paid US$1.34
bn for this acquisition. We forecast EBITDA of Rs17.5 bn and Rs17.7 bn for Anglo for
FY2012E and FY2013E, respectively.
Jharsugda IPP. We have revised our earnings for the 2,400 MW IPP at Jharsuguda to
reflect (1) the higher price of linkage coal due to the price revision effected by Coal India
Ltd, (2) increased dependence on open market purchase, (3) delay in operation of captive
coal mines, and (4) delay in commercial generation of power capacities. We note that CIL
increased prices of domestic coal produced at the Mahanadi Coal by 20% for thermalgrade
coal for power utilities with effect from March 2011. We now factor commercial
generation from Unit#1 and Unit#2 by April 2011 and June 2011, respectively, and entire
2,400 MW to be commercial by June 2012, when the requisite evacuation infrastructure
is put in place.
Balco CPP. We model a delay in commissioning of CPP; we now expect Unit 1 of 4X300
MW power plant to be commissioned in FY2012E versus Units 1 and II earlier. We lower
Balco power sales by 19.7% and 0.8% to 3.6 bn KWh and 9.1 bn KWh for FY2012E and
FY2013E, respectively. We assume that the Durgapur II Taraimar coal block that will feed
Balco’s 4X300 MW captive power plant will commence starting mid-2012E versus
management guidance of September 2011. This coal block is 70 kms away from Korba.
As a result, we lower Balco EBITDA forecast by 31.1% for FY2012E and 32.8% for
FY2013E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (STLT)
Metals & Mining
Strong growth ahead. FY2012E will mark a strong year for Sterlite led by (1) capacity
expansion at Hindustan Zinc, (2) increase in silver production thanks to expansion of
silver-rich Sindeshwar Khurd mine, and (3) commissioning of Jharsugda IPP. These
projects will drive EBITDA CAGR of 41% over the next two years. We have made a few
changes to our model including (1) consolidation of Anglo zinc assets, (2) coal price
increase for the power business, and (3) revised forecast for HZL. We raise our FY2012-
13E EPS by 1-2%. BUY retained with end-FY2012E target price of Rs200.
Multiple growth drivers for the next two years
We forecast strong EBITDA growth for Sterlite over the next two years as expansion projects finally
come on stream. Specifically, we forecast growth of 67.9% in FY2012E and 18.9% in FY2013E
and 48.1% and 21.8% on an organic basis. Catalysts that will support the growth include:
Capacity expansion at Hindustan Zinc. Our recent visit to HZ’s mine and smelter increased our
confidence on the timely commissioning of projects. HZ has already ramped up Sindeshwar
Khurd (SK) ore mining capacity to a monthly run rate of 1.2 mn tonnes. Commissioning of 100
ktpa lead smelter at Dariba smelting complex will be done soon. Post expansion, HZ will have
integrated zinc-lead capacity of 1.06 mn tonnes. Based on the progress, we have raised our
zinc-lead volumes estimates.
HZ management is confident of FY2012E exit capacity of 500 tonnes of silver and production of
400 tonnes from 180 tonnes in FY2011E. Silver is a co-product with the entire production cost
included in the zinc-lead COP; hence silver revenues will not have any cost attached to it.
Growth in production will be helped by ramp-up of silver-rich SK mine that has silver content of
188 ppm. We have increased silver production estimate by 35.9% for FY2012E to 285 tonnes.
Silver will contribute 8.4% and 10.2% to consolidated EBITDA in FY2012E and FY2013E,
respectively.
We expect capitalization of units I and 11 of Jharsugda IPP soon. Commissioning of 600 MW
transmission line to PGCIL in March 2011 will help evacuation of power and COD of unit II.
Power will contribute 37% to incremental EBITDA in FY2012E.
Maintain BUY; estimates revised, TP unchanged at Rs200
We have made a few changes to our estimates, which we elaborate on the subsequent pages.
Sterlite is trading at attractive 5.3X and 3.7X FY2012E and FY2013E attributable EBITDA. Our TP of
Rs200 is based on conservative assumptions and does not build in any equity value to VAL project,
loans extended by Sterlite to VAL and investments in the new 325 ktpa Balco aluminium smelter.
Target price of Rs200 unchanged but a few changes in assumptions
Our end-FY2012E TP of Rs200 remains unchanged; however, we have made a few changes
to our assumptions
We include acquisition of Anglo American’s zinc assets in our financials and valuation
model. We value the zinc international business at US$1.7 bn; higher than the acquisition
price of US$1.34 bn. Note that Sterlite’s acquisition of Anglo’s zinc assets is based on
long-term zinc price assumption of US$1,800/ ton, lower than our assumption. Zinc
international business contributes Rs27/share to our fair value of Sterlite.
Fungibility of cash and complete control on operations will be constrained at Balco and
HZ after adverse decisions by the arbitration panel that ruled in favor of the Government.
This implies that the Government is free to hold on to its stake in Balco or sell its stake to
any player it wishes. Note that Sterlite had bought 51% in Balco with the option to
acquire the balance 49% at a price fixed by an expert panel. The Government disputed
the validity of the call option that was executed in favor of Sterlite. HZ, in which Sterlite
owns 64.9%, also has a similar case. As a result of this change, we introduce holding
company discount of 15% in our valuation methodology (not included earlier; there was
hope of favorable outcome for Sterlite by the arbitration panel).
We eliminate negative value of Rs20/share factored in our valuation earlier pertaining to
funding of VAL. We now assume that Vedanta and Sterlite will provide debt to VAL in
proportion of equity holding rather than Sterlite providing entire excess funding. Note
that we do not value Rs65 bn of equity invested and loans extended by Sterlite to VAL.
Sterlite trades at inexpensive 8.3X FY2012E and 7.5X FY2013E earnings. Note that earnings
of Sterlite will be increasingly de-risked with power and silver contributing 38% to EBITDA
by end-FY2013E.
Changes to our earnings model
Exhibits 1, 2 and 3 summarize key changes to our earnings model. We elaborate some of
the changes in detail.
Hindustan zinc. We increase zinc-lead volume assumption by 5.6% to 943 ktpa for
FY2012E and 2.8% to 1,010 ktpa for FY2013E. We also increase our silver production
assumption by 12.6% and 35.9% to 285 tonnes and 403 tonnes for FY2012E and
FY2013E, respectively. These positives are offset by likely increase in cost of production
following recent increase in mining costs and power and fuel expenses. We increase gross
COP (before byproduct credits) to US$1,277 and US$1,359 for FY2012E and FY2013E,
respectively. We raise our EBITDA estimates by 4.7% and 4.1% for FY2012E and
FY2013E, respectively.
Anglo American zinc assets. We include Anglo American zinc assets in our model. We
forecast zinc-lead metal-in-concentrate sales of 456 kt in FY2012E. Sterlite paid US$1.34
bn for this acquisition. We forecast EBITDA of Rs17.5 bn and Rs17.7 bn for Anglo for
FY2012E and FY2013E, respectively.
Jharsugda IPP. We have revised our earnings for the 2,400 MW IPP at Jharsuguda to
reflect (1) the higher price of linkage coal due to the price revision effected by Coal India
Ltd, (2) increased dependence on open market purchase, (3) delay in operation of captive
coal mines, and (4) delay in commercial generation of power capacities. We note that CIL
increased prices of domestic coal produced at the Mahanadi Coal by 20% for thermalgrade
coal for power utilities with effect from March 2011. We now factor commercial
generation from Unit#1 and Unit#2 by April 2011 and June 2011, respectively, and entire
2,400 MW to be commercial by June 2012, when the requisite evacuation infrastructure
is put in place.
Balco CPP. We model a delay in commissioning of CPP; we now expect Unit 1 of 4X300
MW power plant to be commissioned in FY2012E versus Units 1 and II earlier. We lower
Balco power sales by 19.7% and 0.8% to 3.6 bn KWh and 9.1 bn KWh for FY2012E and
FY2013E, respectively. We assume that the Durgapur II Taraimar coal block that will feed
Balco’s 4X300 MW captive power plant will commence starting mid-2012E versus
management guidance of September 2011. This coal block is 70 kms away from Korba.
As a result, we lower Balco EBITDA forecast by 31.1% for FY2012E and 32.8% for
FY2013E.
No comments:
Post a Comment