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Sterlite Industries (STLT)
Metals & Mining
Beats estimates handsomely, for a change. Sterlite reported a strong all round
performance. Aluminium, copper and zinc business segments beat our estimates
handsomely while the business segment disappointed. Zinc-lead volume growth, silver
refinery expansion and commissioning of power plant will drive 59/18% EBITDA growth
in FY2012/13E. We raise our EPS estimates by 7.8% and 7.7% for FY2012/13E.
Maintain BUY on attractive valuations with a revised TP of Rs220 (Rs200 earlier).
Excellent quarter; net income significantly ahead of our estimate
Sterlite’s 4QFY11 net income of Rs19.2 bn was 37% ahead our estimate led by (1) excellent
operational performance. EBITDA of Rs30.6 bn (+40% yoy) was 17% ahead of our estimate; and
(2) a spike of Rs7.3 bn in other income versus our estimate of Rs3.8 bn. Other income was helped
by FCCB MTM gain of Rs1.4 bn, increase in interest rate on group lending and high yield on
treasury investments (3) lower-than-expected tax rate of 17.2% versus our estimate of 21.4%.
Strong performance across all business segment bar power
EBITDA growth was lead by (1) domestic zinc segment i.e. Hindustan Zinc (HZ) EBITDA grew 31%
qoq and 27% yoy to Rs19.7 bn led by a mix of volume, price and jump in silver production; (2) full
quarter consolidation of zinc international business led to EBITDA of Rs4.4 bn versus Rs0.6 bn in
the 3QFY11; (3) 46% qoq growth in Balco aluminium EBITDA to Rs2.3 bn driven by 9.5% qoq
increase in realizations. Surprisingly, aluminium COP at Balco declined qoq despite a sharp increase
in carbon costs and (4) 56% qoq and 33% yoy growth in copper EBITDA led by sharp increase in
acid realization and increase in copper prices.
Cost of generation surprisingly high at Sterlite Energy
Strong results were somewhat offset by high cost of power generation at Sterlite Energy (SEL) and
management commentary on likely sustenance of the same. We suspect that SEL may be relying
on imported/ e-auction coal in the near term. Management guidance of Rs2.34/ unit on cash cost
of generation is materially higher than our estimate of Rs1.9; we will review the same after further
clarifications. Our EPS for FY2012/13E will be impacted by 3%/9% at the guided cash cost.
Maintain BUY with a target price of Rs220
We raise our EPS estimates for FY2012Eand FY2013E by 7.8% and 7.7%, respectively, to Rs21.3
and Rs24.4. Our estimate increase is driven by (1) change in aluminium price forecast; (2) revision
in earnings estimate of HZ and (3) higher Tc/Rc assumption for copper smelting business. We raise
our target price to Rs220, from Rs200 earlier on roll over of fair value to end-FY2013E financials.
Non-availability of linkage coal for SEL is the key risk to our call
Multiple growth drivers over the next two years to drive stock performance
We forecast EBITDA growth of 59.8% for FY2012E and 18.5% for FY2013E led by (1) full
benefits of zinc-lead capacity expansion; (2) expansion of silver production; (3) inorganic
growth from full year consolidation of zinc assets of Anglo American and (4) strong
contribution from power business. The first unit of Jharsugda IPP (4X600 MW) is already
capitalized, while the second will be capitalized. We model revenues from the remaining
two units only in FY2013E. Balco 4X300 MW power plant will also contribute to EBITDA
over the next two years.
Sterlite is a solid play on organic volumes increase and strong growth in non-cyclical high
cash generating businesses. Sterlite trades at an inexpensive 8.8X FY2012E and 7.6X
FY2013E earnings and 6X FY2012E and 4.3X FY2013E attributable EBITDA.
Our target price of Rs220 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 new 325
ktpa aluminum smelter of Balco. We believe that potential unlocking of value exists on
possible on resolution of disputes and alleged violation of environment protection norms.
We believe that availability of bauxite mines for Vedanta Aluminium (VAL) can add at least
Rs50/share to our fair value.
Non-availability of linkage coal to SEL is the key risk to our call
Sterlite management indicated that cash cost of generation of power at Jharsugda IPP will
likely be Rs2.2-2.3/ unit. We are surprised with the management guidance and suspect that
it builds in a probability of non-availability of linkage coal. Our EBITDA for FY2012/13E will
be impacted by 2.4% and6.5% and EPS by 3.4% and 9.7% at the management guided
cash cost of generation of power from Jharsugda IPP. We keep our estimates on SEL
unchanged pending further clarity on the components and reasons for increase in COP.
VAL reports loss of Rs9.7 bn; likely to burn cash of US$200-300 per annum
Vedanta Aluminium (VAL), a group company in which Sterlite has 29.5% stake, reported net
loss of Rs2.7 bn for 4QFY11 and Rs9.7 bn for FY2011. Sterlite share of losses in the same
was Rs800 mn and Rs2.9 bn for 4QFY11 and FY2011, respectively. The cost of production
of VAL increased by 24% yoy to US$2,089/ tonne of hot metal. The cost increase was led
higher power and alumina costs.
Sterlite also shared balance sheet details of VAL; key highlights include:
Balance sheet size of VAL is US$6.34 bn. This comprises of operational 1290 MW
captive power plant, 500ktpa aluminium smelter, 1 mtpa alumina refinery and CWIP
related to the second phase of VAL project which envisaged expansion of aluminium
smelting capacity to 1.75 mtpa and alumina refinery to 6mtpa. VAL will expand
aluminium smelting capacity though it is unlikely to start metal tapping till is receives
bauxite mine from the Government of India.
Sterlite has provided US$1.8 bn to VAL comprising of US$125 mn equity investment
and US$1.75 bn of debt funding. In comparison to US$1.8 bn invested by Sterlite,
Vedanta Resources Plc has invested only US$1.4 bn even though it owns 69.5% in VAL.
Borrowings of VAL total US$5.9 bn comprising US$2.95 bn in external funding and
US$2.93 bn by Vedanta Resources and Sterlite. Equity of VAL is a marginal US$434 mn.
VAL is unlikely to break even at the net income level till it receives the bauxite mine. We
forecast net loss of Rs2.5-3.3 bn over the next few years. Cash losses will be higher since the
interest cost related to aluminium smelter expansion will be capitalized rather than routed
through P&L. Cash burn of VAL is likely to be in the range of US$200-300 mn p.a.. Reported
losses of VAL are likely to be lower than FY2011 primarily on account of higher aluminium
prices.
Discussion on divisional performance
Sterlite’s 4QFY11 results were ahead of our expectations. Performance across all segments is
as under:
Zinc, lead and silver segment: Hindustan Zinc’s reported EBITDA of Rs19.7 bn
(+27.1%yoy, +30.6%qoq) was 16.2% ahead of our estimate of Rs17 bn. Operational
outperformance can be attributed to; (1) higher-than-expected refined zinc sales; and (2)
higher silver sales at 44.3tonnes versus our estimate of 35 tonnes. Due to delay in
commissioning of lead smelter, HZ sold lead concentrate (which had silver particles) from
the SK mine. Silver content in lead concentrate sold during the quarter was ~28 tonnes,
which was not factored in our estimate. HZ’s 4QFY11 net zinc metal cost of production
(excluding royalty) was flattish sequentially at US$784/tonne and was lower than our
estimate.
Zinc international: The recently acquired zinc assets from Anglo American produced
44kt and 36kt of mined and refined zinc in Q4FY11. COP of US$1,200/ ton was 5%
higher than our estimate. Revenues and EBITDA from zinc international for the quarter
was Rs8.4 bn and Rs4.4 bn, respectively. The international zinc business comprises of
Skorpion Zinc mines in Namibia, Lisheen zinc mine in Ireland and Black Mountain mines in
South Africa.
Copper segment: 4QFY11 copper business EBITDA of Rs3.5 bn (+33.1%yoy,
+55.6%qoq) was 33% ahead of our estimate of Rs2.6 bn. Outperformance can be
attributed to an increase in acid realization and lower-than-expected conversion cost.
Copper cathode production and mined metal production of 80kt and 5kt in Q4FY11 was
in line with our estimates.
Aluminium segment: 4QFY11 aluminium business EBITDA of Rs2.3 bn (+10.9% yoy,
+45.6 qoq) was higher than our estimate of Rs1.9 bn. Performance was aided by increase
in average realization to US$2,989/ tonne versus US$2,749/ tonne in 3QFY11. COP
declined marginally qoq despite increase in carbon costs; management attributed the
same to lower power costs.
Power segment: 4QFY11 EBITDA of Rs0.8 bn declined 25.6% yoy and was marginally
below our estimate. Average power realizations declined 36.1% yoy to Rs3.02/ unit.
Higher coal costs led to 16% yoy increase in cost of generation. Power sales include 210
mn units from SEL’s first unit of 600 MW power plant (2400 MW overall size of
Jharsugda power plant) that was capitalized on March 1, 2011.The second unit will likely
be capitalized in a few days. The cost of power generation at SEL was surprisingly high at
Rs2.34/ unit.
Key assumptions driving our FY2012E and FY2013E forecast
We elaborate on key assumptions and changes to our model for FY2012E and FY2013E
Zinc business: HZ estimates are based on zinc price forecast of US$2,300 and US$2,350
for FY2012E and FY2013E. Our zinc volumes are largely unchanged though we have
taken a conservative view on refined lead production, especially noting the nonavailability
of captive feed for expanded lead smelting capacity. Our silver production
estimates are largely unchanged. We have, however, raised our silver price assumption to
US$32.8/oz from US$27.3/oz earlier for FY2012E and FY2013E, respectively.
Aluminium business: We have revised our aluminium price forecast for FY2012E and
FY2013E to US$2,400 /tonne and US$2,450 /tonne from US$2,250 and US$2,300 earlier.
The increase in our aluminium price forecast is largely a cost-push function with recent
increase in alumina, fuel and carbon prices as the primary reasons. This results in 9.8%
and 18.7% increase in Balco FY2012E and FY2013E EBITDA, respectively.
Copper smelting business. We have raised Tc/Rc margin to 15.5c/lb for FY2012E and
FY2013E from 13.25c/lb. Recent increase in Tc/Rc margin globally bodes well for Sterlite.
We raise Sterlite’s copper smelting EBITDA by 13.7% and 16.6% to Rs8.1 bn and Rs8.3
bn for FY2012E and FY2013E, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (STLT)
Metals & Mining
Beats estimates handsomely, for a change. Sterlite reported a strong all round
performance. Aluminium, copper and zinc business segments beat our estimates
handsomely while the business segment disappointed. Zinc-lead volume growth, silver
refinery expansion and commissioning of power plant will drive 59/18% EBITDA growth
in FY2012/13E. We raise our EPS estimates by 7.8% and 7.7% for FY2012/13E.
Maintain BUY on attractive valuations with a revised TP of Rs220 (Rs200 earlier).
Excellent quarter; net income significantly ahead of our estimate
Sterlite’s 4QFY11 net income of Rs19.2 bn was 37% ahead our estimate led by (1) excellent
operational performance. EBITDA of Rs30.6 bn (+40% yoy) was 17% ahead of our estimate; and
(2) a spike of Rs7.3 bn in other income versus our estimate of Rs3.8 bn. Other income was helped
by FCCB MTM gain of Rs1.4 bn, increase in interest rate on group lending and high yield on
treasury investments (3) lower-than-expected tax rate of 17.2% versus our estimate of 21.4%.
Strong performance across all business segment bar power
EBITDA growth was lead by (1) domestic zinc segment i.e. Hindustan Zinc (HZ) EBITDA grew 31%
qoq and 27% yoy to Rs19.7 bn led by a mix of volume, price and jump in silver production; (2) full
quarter consolidation of zinc international business led to EBITDA of Rs4.4 bn versus Rs0.6 bn in
the 3QFY11; (3) 46% qoq growth in Balco aluminium EBITDA to Rs2.3 bn driven by 9.5% qoq
increase in realizations. Surprisingly, aluminium COP at Balco declined qoq despite a sharp increase
in carbon costs and (4) 56% qoq and 33% yoy growth in copper EBITDA led by sharp increase in
acid realization and increase in copper prices.
Cost of generation surprisingly high at Sterlite Energy
Strong results were somewhat offset by high cost of power generation at Sterlite Energy (SEL) and
management commentary on likely sustenance of the same. We suspect that SEL may be relying
on imported/ e-auction coal in the near term. Management guidance of Rs2.34/ unit on cash cost
of generation is materially higher than our estimate of Rs1.9; we will review the same after further
clarifications. Our EPS for FY2012/13E will be impacted by 3%/9% at the guided cash cost.
Maintain BUY with a target price of Rs220
We raise our EPS estimates for FY2012Eand FY2013E by 7.8% and 7.7%, respectively, to Rs21.3
and Rs24.4. Our estimate increase is driven by (1) change in aluminium price forecast; (2) revision
in earnings estimate of HZ and (3) higher Tc/Rc assumption for copper smelting business. We raise
our target price to Rs220, from Rs200 earlier on roll over of fair value to end-FY2013E financials.
Non-availability of linkage coal for SEL is the key risk to our call
Multiple growth drivers over the next two years to drive stock performance
We forecast EBITDA growth of 59.8% for FY2012E and 18.5% for FY2013E led by (1) full
benefits of zinc-lead capacity expansion; (2) expansion of silver production; (3) inorganic
growth from full year consolidation of zinc assets of Anglo American and (4) strong
contribution from power business. The first unit of Jharsugda IPP (4X600 MW) is already
capitalized, while the second will be capitalized. We model revenues from the remaining
two units only in FY2013E. Balco 4X300 MW power plant will also contribute to EBITDA
over the next two years.
Sterlite is a solid play on organic volumes increase and strong growth in non-cyclical high
cash generating businesses. Sterlite trades at an inexpensive 8.8X FY2012E and 7.6X
FY2013E earnings and 6X FY2012E and 4.3X FY2013E attributable EBITDA.
Our target price of Rs220 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 new 325
ktpa aluminum smelter of Balco. We believe that potential unlocking of value exists on
possible on resolution of disputes and alleged violation of environment protection norms.
We believe that availability of bauxite mines for Vedanta Aluminium (VAL) can add at least
Rs50/share to our fair value.
Non-availability of linkage coal to SEL is the key risk to our call
Sterlite management indicated that cash cost of generation of power at Jharsugda IPP will
likely be Rs2.2-2.3/ unit. We are surprised with the management guidance and suspect that
it builds in a probability of non-availability of linkage coal. Our EBITDA for FY2012/13E will
be impacted by 2.4% and6.5% and EPS by 3.4% and 9.7% at the management guided
cash cost of generation of power from Jharsugda IPP. We keep our estimates on SEL
unchanged pending further clarity on the components and reasons for increase in COP.
VAL reports loss of Rs9.7 bn; likely to burn cash of US$200-300 per annum
Vedanta Aluminium (VAL), a group company in which Sterlite has 29.5% stake, reported net
loss of Rs2.7 bn for 4QFY11 and Rs9.7 bn for FY2011. Sterlite share of losses in the same
was Rs800 mn and Rs2.9 bn for 4QFY11 and FY2011, respectively. The cost of production
of VAL increased by 24% yoy to US$2,089/ tonne of hot metal. The cost increase was led
higher power and alumina costs.
Sterlite also shared balance sheet details of VAL; key highlights include:
Balance sheet size of VAL is US$6.34 bn. This comprises of operational 1290 MW
captive power plant, 500ktpa aluminium smelter, 1 mtpa alumina refinery and CWIP
related to the second phase of VAL project which envisaged expansion of aluminium
smelting capacity to 1.75 mtpa and alumina refinery to 6mtpa. VAL will expand
aluminium smelting capacity though it is unlikely to start metal tapping till is receives
bauxite mine from the Government of India.
Sterlite has provided US$1.8 bn to VAL comprising of US$125 mn equity investment
and US$1.75 bn of debt funding. In comparison to US$1.8 bn invested by Sterlite,
Vedanta Resources Plc has invested only US$1.4 bn even though it owns 69.5% in VAL.
Borrowings of VAL total US$5.9 bn comprising US$2.95 bn in external funding and
US$2.93 bn by Vedanta Resources and Sterlite. Equity of VAL is a marginal US$434 mn.
VAL is unlikely to break even at the net income level till it receives the bauxite mine. We
forecast net loss of Rs2.5-3.3 bn over the next few years. Cash losses will be higher since the
interest cost related to aluminium smelter expansion will be capitalized rather than routed
through P&L. Cash burn of VAL is likely to be in the range of US$200-300 mn p.a.. Reported
losses of VAL are likely to be lower than FY2011 primarily on account of higher aluminium
prices.
Discussion on divisional performance
Sterlite’s 4QFY11 results were ahead of our expectations. Performance across all segments is
as under:
Zinc, lead and silver segment: Hindustan Zinc’s reported EBITDA of Rs19.7 bn
(+27.1%yoy, +30.6%qoq) was 16.2% ahead of our estimate of Rs17 bn. Operational
outperformance can be attributed to; (1) higher-than-expected refined zinc sales; and (2)
higher silver sales at 44.3tonnes versus our estimate of 35 tonnes. Due to delay in
commissioning of lead smelter, HZ sold lead concentrate (which had silver particles) from
the SK mine. Silver content in lead concentrate sold during the quarter was ~28 tonnes,
which was not factored in our estimate. HZ’s 4QFY11 net zinc metal cost of production
(excluding royalty) was flattish sequentially at US$784/tonne and was lower than our
estimate.
Zinc international: The recently acquired zinc assets from Anglo American produced
44kt and 36kt of mined and refined zinc in Q4FY11. COP of US$1,200/ ton was 5%
higher than our estimate. Revenues and EBITDA from zinc international for the quarter
was Rs8.4 bn and Rs4.4 bn, respectively. The international zinc business comprises of
Skorpion Zinc mines in Namibia, Lisheen zinc mine in Ireland and Black Mountain mines in
South Africa.
Copper segment: 4QFY11 copper business EBITDA of Rs3.5 bn (+33.1%yoy,
+55.6%qoq) was 33% ahead of our estimate of Rs2.6 bn. Outperformance can be
attributed to an increase in acid realization and lower-than-expected conversion cost.
Copper cathode production and mined metal production of 80kt and 5kt in Q4FY11 was
in line with our estimates.
Aluminium segment: 4QFY11 aluminium business EBITDA of Rs2.3 bn (+10.9% yoy,
+45.6 qoq) was higher than our estimate of Rs1.9 bn. Performance was aided by increase
in average realization to US$2,989/ tonne versus US$2,749/ tonne in 3QFY11. COP
declined marginally qoq despite increase in carbon costs; management attributed the
same to lower power costs.
Power segment: 4QFY11 EBITDA of Rs0.8 bn declined 25.6% yoy and was marginally
below our estimate. Average power realizations declined 36.1% yoy to Rs3.02/ unit.
Higher coal costs led to 16% yoy increase in cost of generation. Power sales include 210
mn units from SEL’s first unit of 600 MW power plant (2400 MW overall size of
Jharsugda power plant) that was capitalized on March 1, 2011.The second unit will likely
be capitalized in a few days. The cost of power generation at SEL was surprisingly high at
Rs2.34/ unit.
Key assumptions driving our FY2012E and FY2013E forecast
We elaborate on key assumptions and changes to our model for FY2012E and FY2013E
Zinc business: HZ estimates are based on zinc price forecast of US$2,300 and US$2,350
for FY2012E and FY2013E. Our zinc volumes are largely unchanged though we have
taken a conservative view on refined lead production, especially noting the nonavailability
of captive feed for expanded lead smelting capacity. Our silver production
estimates are largely unchanged. We have, however, raised our silver price assumption to
US$32.8/oz from US$27.3/oz earlier for FY2012E and FY2013E, respectively.
Aluminium business: We have revised our aluminium price forecast for FY2012E and
FY2013E to US$2,400 /tonne and US$2,450 /tonne from US$2,250 and US$2,300 earlier.
The increase in our aluminium price forecast is largely a cost-push function with recent
increase in alumina, fuel and carbon prices as the primary reasons. This results in 9.8%
and 18.7% increase in Balco FY2012E and FY2013E EBITDA, respectively.
Copper smelting business. We have raised Tc/Rc margin to 15.5c/lb for FY2012E and
FY2013E from 13.25c/lb. Recent increase in Tc/Rc margin globally bodes well for Sterlite.
We raise Sterlite’s copper smelting EBITDA by 13.7% and 16.6% to Rs8.1 bn and Rs8.3
bn for FY2012E and FY2013E, respectively.
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