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Strong profit growth ahead
We upgrade Sterlite’s FY12-13 EPS by 7-8% factoring in CLSA’s new base
metal price forecasts. We see Sterlite delivering strong 34% EPS CAGR over
FY11-13 even after accounting for further delays in Sterlite Energy’s (SEL)
and Balco’s expansions. We believe that most of the company-specific
negatives that have plagued the stock in 2010 are priced in and expect better
stock performance ahead driven by the superior earnings growth profile.
Maintain O-PF with a revised target price of Rs195.
Zinc business will drive strong earnings growth over FY12-13
Hindustan Zinc (HZL) will provide 8% CAGR in zinc volumes and 65% CAGR in
silver volumes over FY11-13, driving strong 25% profit CAGR over the period.
Silver will rise to 19% of HZL’s EBITDA by FY13 (10% in FY11) providing a case
for some expansion in multiples. Rising cash costs have been a concern in the last
year but we believe that our estimates adequately factor in the same. Anglo-zinc
will also be a big contributor to Sterlite’s earnings growth over FY12-13. On our
new zinc-lead price forecasts, we now see the Anglo-zinc acquisition as being
value-accretive for Sterlite (value-neutral previously). This is without assigning
any value to the Gamsberg project, which we treat as option value.
Sterlite Energy and Balco expansions to drive further growth
SEL is targeting to commission Units 3 & 4 of its 2400MW plant by 3QFY12. We
have built in 3-6m delays here but even after this, SEL provides strong accretion
to earnings over FY12 and FY13. We assume linkage coal, e-auction coal and
imported coal to provide a third each of SEL’s coal requirements. Balco will also
commission its 1200MW power plant by 2QFY13 (assuming delay of 3m). We have
not assumed any benefit from Balco’s captive coal block as it is still awaiting
clearances.
What we worry about on Sterlite?
Our key concerns on Sterlite are – 1) More delays in SEL (we have assumed 3-
6m); 2) Lower eventual PLF in SEL (we have assumed 85%); 3) Coal supply for
SEL (we have assumed just a third from coal linkage); 4) Larger than expected
losses in VAL and any increase in Sterlite’s equity stake in the company
(management maintains that Sterlite’s 29.5% stake will not change).
Upgrading FY12-13 estimates by 7-8%; maintain O-PF
Zinc and power will constitute 69% and 12% of Sterlite’s consol EPS in FY13.
Given that the latter is driven by projects under commissioning, satisfactory
execution by Sterlite here will be crucial. We maintain O-PF on Sterlite. Our target
price drops slightly to Rs195 (Rs202 previously) as we have cut our long-term PLF
for SEL to 85%, which impacts its DCF value and use a lower multiple for HZL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong profit growth ahead
We upgrade Sterlite’s FY12-13 EPS by 7-8% factoring in CLSA’s new base
metal price forecasts. We see Sterlite delivering strong 34% EPS CAGR over
FY11-13 even after accounting for further delays in Sterlite Energy’s (SEL)
and Balco’s expansions. We believe that most of the company-specific
negatives that have plagued the stock in 2010 are priced in and expect better
stock performance ahead driven by the superior earnings growth profile.
Maintain O-PF with a revised target price of Rs195.
Zinc business will drive strong earnings growth over FY12-13
Hindustan Zinc (HZL) will provide 8% CAGR in zinc volumes and 65% CAGR in
silver volumes over FY11-13, driving strong 25% profit CAGR over the period.
Silver will rise to 19% of HZL’s EBITDA by FY13 (10% in FY11) providing a case
for some expansion in multiples. Rising cash costs have been a concern in the last
year but we believe that our estimates adequately factor in the same. Anglo-zinc
will also be a big contributor to Sterlite’s earnings growth over FY12-13. On our
new zinc-lead price forecasts, we now see the Anglo-zinc acquisition as being
value-accretive for Sterlite (value-neutral previously). This is without assigning
any value to the Gamsberg project, which we treat as option value.
Sterlite Energy and Balco expansions to drive further growth
SEL is targeting to commission Units 3 & 4 of its 2400MW plant by 3QFY12. We
have built in 3-6m delays here but even after this, SEL provides strong accretion
to earnings over FY12 and FY13. We assume linkage coal, e-auction coal and
imported coal to provide a third each of SEL’s coal requirements. Balco will also
commission its 1200MW power plant by 2QFY13 (assuming delay of 3m). We have
not assumed any benefit from Balco’s captive coal block as it is still awaiting
clearances.
What we worry about on Sterlite?
Our key concerns on Sterlite are – 1) More delays in SEL (we have assumed 3-
6m); 2) Lower eventual PLF in SEL (we have assumed 85%); 3) Coal supply for
SEL (we have assumed just a third from coal linkage); 4) Larger than expected
losses in VAL and any increase in Sterlite’s equity stake in the company
(management maintains that Sterlite’s 29.5% stake will not change).
Upgrading FY12-13 estimates by 7-8%; maintain O-PF
Zinc and power will constitute 69% and 12% of Sterlite’s consol EPS in FY13.
Given that the latter is driven by projects under commissioning, satisfactory
execution by Sterlite here will be crucial. We maintain O-PF on Sterlite. Our target
price drops slightly to Rs195 (Rs202 previously) as we have cut our long-term PLF
for SEL to 85%, which impacts its DCF value and use a lower multiple for HZL.
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