Sterlite Industries- 1Q12 results; in line, but with off-setting effects  HSBC Research,

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Sterlite Industries (STLT)
OW: 1Q12 results; in line, but with off-setting effects
 EBITDA at INR27.5 better than expected; intl. zinc business
offsets weakness in power business
 Higher costs/production outage hit VAL profits; new
investments by STLT in VAL not encouraging either
 Retain OW rating and TP of INR220


Strong zinc business offsets weak performance from power business
 STLT reported EBITDA of INR27.5bn (+84% y-o-y/ -10% q-o-q – see Exhibits 1&2)
vs HSBCe of INR25bn as stronger performance by zinc segment [both Hindustan
Zinc (HZ IN, N, TP INR150) and international business] offset weakness in the power
business (mere 20% y-o-y increase in EBITDA at INR1.6bn despite tripling of units
sold, due to 27% drop in realisations and 63% increase in generation costs).
 EBITDA at the Intl. Zinc operations at INR51.bn was up by 18% q-o-q due to record
production at the BlackMountain mines.
 Copper EBITDA at INR3.3bn (+27% y-o-y/ -5% q-o-q) was positively impacted
following a drop in production costs to -USD2.9/t (USD6.9/t in 1Q11) following
higher by-product credits which offset c8% q-o-q/4% y-o-y fall in copper volumes.
 BALCO’s aluminium production cost at USD1981/t was up c10% q-o-q/y-o-y due to
higher alumina and coal costs. EBITDA at INR1.9bn was 17% lower q-o-q.
VAL net continues in red; STLT’s new investments in VAL not encouraging either
STLT increased investments in Vedanta Aluminium Ltd. (VAL) by cINR9bn q-o-q while
Vedanta Resources [VED LN, OW, TP GBP24.6] reduced its investment by a similar
amount. Management explained that this was following withdrawal of SESA’s (subsidiary
of VED) ICD to VAL as the former needed cash for its open-offer to Cairn shareholders.
This takes STLT’s investment in VAL to 32% of total funding from 30% at the end of
FY11- against the 29.5% equity in VAL.
VAL reported a 1Q12 EBITDA of INR211m (+51% y-o-y) & net loss of INR360m (-
INR266m in 1Q11) led by a 10% growth in alumina and 45% growth in aluminium
volumes, but a higher cost outlook (up 24% y-o-y in 1Q due to higher alumina and coal)
may limit the returns STLT can generate from VAL.
Remain OW with TP of INR220
We value STLT on SoTP basis (details on pg4) at INR220/share and rate STLT
Overweight. Lower-than-expected commodity prices/merchant power rates and delayed
project execution form key downside risks.