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Macro concerns drive sector underperformance; Buy Sterlite
Rising global/domestic macro risks drive sector underperformance
The Indian Base Metals sector has, on average, underperformed the BSE
Sensex by 5% ytd. In our view, this has been driven by: (1) macro concerns
over the domestic economy in a period of rising inflation and tightening
policy response; and (2) weak commodity prices on global concerns over
the durability of economic recovery, fresh escalation of the sovereign debt
crisis driving investors to avoid “risk assets” including industrial metals, a
potential Chinese slowdown and a US dollar rally on “safe haven” buying.
Higher cash costs and tight physical markets drive price revisions
We incorporate higher commodity price assumptions for our coverage
group. Despite weak fundamentals, aluminium has performed best so far
this year, as: 1) prices have remained close to cash costs, which have been
rising with a surge in energy prices and power tariffs; and 2) surplus
inventory has been tied up in financing deals, creating tightness in physical
markets, as evident in rising regional premiums. Zinc prices are down 9%
ytd as LME stocks hit 16-year highs. Copper TC/RC has improved as
concentrate markets moved into surplus with smelter outages. We revise
FY12-FY14 EPS estimates by -19% to +30% incorporating these changes.
Reinstate ratings on Sterlite (Buy) and Hindustan Zinc (Neutral)
We remove the Not Rated designation on Sterlite and Hind Zinc. We rate
Sterlite as Buy for its attractive valuations (40% discount to peers), sector
leading EPS growth, high visibility on cash flows with the recent acquisition of
international zinc assets and ramp up of Sterlite Energy, and its strong balance
sheet (net cash at about 25% of its market cap). Our SOTP based 12-month
target price of Rs206 offers 28% potential upside and reinstate rating with a
Buy. We rate Hind Zinc as Neutral as we see it as fairly valued. Our P/B based
12-m TP is Rs140. We introduce FY14E EPS for Sterlite/Hind Zinc.
Upgrade Nalco to Neutral; remain Neutral on Hindalco
We upgrade Nalco to Neutral from Sell after recent underperformance and
balanced risk-reward profile, but cut our 12-mth target price to Rs87 from
Rs91.25 on a lower P/B multiple (1.7x from 1.9x). We rate Hindalco Neutral
despite recent underperformance as announcements of project delays will
drive consensus earnings cuts, in our view, even for FY13E. We cut our 12-
mth target price to Rs190 from Rs207 on a lower P/B multiple of 1.2x (from
1.3x). Risks: commodity price volatility, delays in growth projects
Sterlite Industries – Strong growth at attractive valuations, Buy
Investment thesis
We remove the Not Rated designation on Sterlite Industries (STRL.BO)
and rate the company Buy rating, with a 12-month SOTP based target
price of Rs206 implying 28% potential upside.
Attractive valuations: Sterlite is trading at FY12E EV/EBITDA of 3.1X
which is a 40% discount to global peers at 5.1x and 43% discount to its
mid-cycle multiple of 5.4X. In our view, the market is ascribing no
value to the power business, but is also valuing the base business,
comprising existing productive assets, at a discount.
FY11-13E EPS CAGR of about 45% is the highest in the sector:
Sterlite has sector-leading EPS CAGR of 44% over FY11-13E, driven by
consolidation of the recently acquired Anglo Zinc assets (Zinc
International), strong growth in lead and silver volumes from ongoing
expansion projects, and gradual commissioning of Sterlite Energy’s
2,400 MW commercial energy project in Orissa. We raise our FY12-
FY13 EPS estimates by 19%/30% to account for these new cash flow
streams. We also introduce our FY14E EPS estimate of Rs32.27.
Zinc International – a strategic positive: We view the recent
acquisition of international zinc assets as a strategic positive as: (1)
earnings and cash flow accretive asset with 50% EBITDA margins; (2)
adds a global portfolio of operations in South Africa, Namibia and
Ireland; (3) opportunity to reduce costs through improving operating
efficiencies (FY11 cost of US$1,130 / T); (4) option value to develop the
Gamsberg greenfield project which has resources of about 186 mn
tonnes.
Globally competitive cost base to drive sustainable returns:
Sterlite’s 65%-owned subsidiary Hindustan Zinc is among the lowest
cost producers of zinc in the world (FY11 cost of US$990/T). Even the
copper smelting business at Tuticorin is one of the least cost smelters
with FY11 smelting cost of US 4c/lb due to high recovery rates, better
operating efficiencies and strong by-product credits.
Strong balance sheet: Sterlite had net cash of about US$3bn at end
FY11, which is about 25% of its current market cap – which, in our
view, gives it the flexibility to pursue growth projects.
Risks: (1) Commodity price weakness; (2) delays in growth projects;
(3) overhang of regulatory issues / environmental litigation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Macro concerns drive sector underperformance; Buy Sterlite
Rising global/domestic macro risks drive sector underperformance
The Indian Base Metals sector has, on average, underperformed the BSE
Sensex by 5% ytd. In our view, this has been driven by: (1) macro concerns
over the domestic economy in a period of rising inflation and tightening
policy response; and (2) weak commodity prices on global concerns over
the durability of economic recovery, fresh escalation of the sovereign debt
crisis driving investors to avoid “risk assets” including industrial metals, a
potential Chinese slowdown and a US dollar rally on “safe haven” buying.
Higher cash costs and tight physical markets drive price revisions
We incorporate higher commodity price assumptions for our coverage
group. Despite weak fundamentals, aluminium has performed best so far
this year, as: 1) prices have remained close to cash costs, which have been
rising with a surge in energy prices and power tariffs; and 2) surplus
inventory has been tied up in financing deals, creating tightness in physical
markets, as evident in rising regional premiums. Zinc prices are down 9%
ytd as LME stocks hit 16-year highs. Copper TC/RC has improved as
concentrate markets moved into surplus with smelter outages. We revise
FY12-FY14 EPS estimates by -19% to +30% incorporating these changes.
Reinstate ratings on Sterlite (Buy) and Hindustan Zinc (Neutral)
We remove the Not Rated designation on Sterlite and Hind Zinc. We rate
Sterlite as Buy for its attractive valuations (40% discount to peers), sector
leading EPS growth, high visibility on cash flows with the recent acquisition of
international zinc assets and ramp up of Sterlite Energy, and its strong balance
sheet (net cash at about 25% of its market cap). Our SOTP based 12-month
target price of Rs206 offers 28% potential upside and reinstate rating with a
Buy. We rate Hind Zinc as Neutral as we see it as fairly valued. Our P/B based
12-m TP is Rs140. We introduce FY14E EPS for Sterlite/Hind Zinc.
Upgrade Nalco to Neutral; remain Neutral on Hindalco
We upgrade Nalco to Neutral from Sell after recent underperformance and
balanced risk-reward profile, but cut our 12-mth target price to Rs87 from
Rs91.25 on a lower P/B multiple (1.7x from 1.9x). We rate Hindalco Neutral
despite recent underperformance as announcements of project delays will
drive consensus earnings cuts, in our view, even for FY13E. We cut our 12-
mth target price to Rs190 from Rs207 on a lower P/B multiple of 1.2x (from
1.3x). Risks: commodity price volatility, delays in growth projects
Sterlite Industries – Strong growth at attractive valuations, Buy
Investment thesis
We remove the Not Rated designation on Sterlite Industries (STRL.BO)
and rate the company Buy rating, with a 12-month SOTP based target
price of Rs206 implying 28% potential upside.
Attractive valuations: Sterlite is trading at FY12E EV/EBITDA of 3.1X
which is a 40% discount to global peers at 5.1x and 43% discount to its
mid-cycle multiple of 5.4X. In our view, the market is ascribing no
value to the power business, but is also valuing the base business,
comprising existing productive assets, at a discount.
FY11-13E EPS CAGR of about 45% is the highest in the sector:
Sterlite has sector-leading EPS CAGR of 44% over FY11-13E, driven by
consolidation of the recently acquired Anglo Zinc assets (Zinc
International), strong growth in lead and silver volumes from ongoing
expansion projects, and gradual commissioning of Sterlite Energy’s
2,400 MW commercial energy project in Orissa. We raise our FY12-
FY13 EPS estimates by 19%/30% to account for these new cash flow
streams. We also introduce our FY14E EPS estimate of Rs32.27.
Zinc International – a strategic positive: We view the recent
acquisition of international zinc assets as a strategic positive as: (1)
earnings and cash flow accretive asset with 50% EBITDA margins; (2)
adds a global portfolio of operations in South Africa, Namibia and
Ireland; (3) opportunity to reduce costs through improving operating
efficiencies (FY11 cost of US$1,130 / T); (4) option value to develop the
Gamsberg greenfield project which has resources of about 186 mn
tonnes.
Globally competitive cost base to drive sustainable returns:
Sterlite’s 65%-owned subsidiary Hindustan Zinc is among the lowest
cost producers of zinc in the world (FY11 cost of US$990/T). Even the
copper smelting business at Tuticorin is one of the least cost smelters
with FY11 smelting cost of US 4c/lb due to high recovery rates, better
operating efficiencies and strong by-product credits.
Strong balance sheet: Sterlite had net cash of about US$3bn at end
FY11, which is about 25% of its current market cap – which, in our
view, gives it the flexibility to pursue growth projects.
Risks: (1) Commodity price weakness; (2) delays in growth projects;
(3) overhang of regulatory issues / environmental litigation.
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