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Downgrade to Underperform
Sterlite’s 1Q results were inline with estimates but were accompanied by
many negatives. Sterlite Energy’s (SEL) costs in 1Q were much higher than
expected. Units 3 and 4 of SEL are delayed by another 3m and could be
delayed further if the coal situation does not improve. Vedanta Aluminium’s
(VAL) costs and losses widened and Sterlite’s loan to VAL has gone up by
Rs9bn. Hindustan Zinc’s costs increased sharply and Anglo Zinc’s profits, too,
were lower than expected. We cut FY12-13 consol EPS by 5-9% and
downgrade Sterlite to U-PF with a target price of Rs175.
Sterlite Energy under pressure
SEL’s cost of production was a high Rs2.86/unit as it received just 30% of coal
requirements from Coal India and had to depend on e-auction/imported coal for
the rest. With Coal India’s production and despatch issues continuing, we are not
hopeful of an early decline in costs. With realizations at Rs3.5/unit, SEL’s
profitability is much lower than we expected. Units 3 & 4 of SEL now stand
delayed by a further 3m and management is implicitly linking commissioning to an
improvement in the coal situation.
VAL losses set to widen; loan from Sterlite to VAL rises 11% QoQ
VAL’s cost of production has risen 12% QoQ to US$2,344/t due to higher coal and
imported alumina costs. VAL, too, is receiving insufficient coal from Coal India and
captive bauxite remains elusive. VAL’s losses have risen by 33% QoQ and given
the costs related to a power outage in 1Q, should rise further in balance FY12.
Sterlite’s loan to VAL has risen by Rs9bn QoQ and has replaced the Sesa Goa
loan, which was paid back by VAL during 1Q. We don’t treat loans to VAL as cash.
Zinc costs continue to move up; copper the sole positive in 1Q
HZL’s total costs (excl royalty) rose 17% QoQ to US$1,121/t and management’s
guidance of a US$100/t decline three quarters back has not materialized. Higher
production and other income, though, ensured an earnings beat by HZL in 1Q.
Anglo Zinc’s profits, too, missed our estimates due to higher depreciation. Copper
division was the only positive in 1Q results with higher by-product credits driving
a 34% EBITDA beat versus our estimates.
Cutting estimates by 5-9%; downgrade to U-PF
The 5-9% cut in FY12-13 EPS is mainly due to – 1) Further delays and higher coal
costs in SEL; 2) Higher losses in VAL; 3) Higher costs in zinc; with higher copper
margins not compensating for the same. We believe that operational improvement
in power and aluminium businesses is needed for stock performance to improve.
YoY earnings growth will be strong in 2Q and 3Q but will slide 4QFY12 onwards.
We downgrade Sterlite to U-PF from O-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrade to Underperform
Sterlite’s 1Q results were inline with estimates but were accompanied by
many negatives. Sterlite Energy’s (SEL) costs in 1Q were much higher than
expected. Units 3 and 4 of SEL are delayed by another 3m and could be
delayed further if the coal situation does not improve. Vedanta Aluminium’s
(VAL) costs and losses widened and Sterlite’s loan to VAL has gone up by
Rs9bn. Hindustan Zinc’s costs increased sharply and Anglo Zinc’s profits, too,
were lower than expected. We cut FY12-13 consol EPS by 5-9% and
downgrade Sterlite to U-PF with a target price of Rs175.
Sterlite Energy under pressure
SEL’s cost of production was a high Rs2.86/unit as it received just 30% of coal
requirements from Coal India and had to depend on e-auction/imported coal for
the rest. With Coal India’s production and despatch issues continuing, we are not
hopeful of an early decline in costs. With realizations at Rs3.5/unit, SEL’s
profitability is much lower than we expected. Units 3 & 4 of SEL now stand
delayed by a further 3m and management is implicitly linking commissioning to an
improvement in the coal situation.
VAL losses set to widen; loan from Sterlite to VAL rises 11% QoQ
VAL’s cost of production has risen 12% QoQ to US$2,344/t due to higher coal and
imported alumina costs. VAL, too, is receiving insufficient coal from Coal India and
captive bauxite remains elusive. VAL’s losses have risen by 33% QoQ and given
the costs related to a power outage in 1Q, should rise further in balance FY12.
Sterlite’s loan to VAL has risen by Rs9bn QoQ and has replaced the Sesa Goa
loan, which was paid back by VAL during 1Q. We don’t treat loans to VAL as cash.
Zinc costs continue to move up; copper the sole positive in 1Q
HZL’s total costs (excl royalty) rose 17% QoQ to US$1,121/t and management’s
guidance of a US$100/t decline three quarters back has not materialized. Higher
production and other income, though, ensured an earnings beat by HZL in 1Q.
Anglo Zinc’s profits, too, missed our estimates due to higher depreciation. Copper
division was the only positive in 1Q results with higher by-product credits driving
a 34% EBITDA beat versus our estimates.
Cutting estimates by 5-9%; downgrade to U-PF
The 5-9% cut in FY12-13 EPS is mainly due to – 1) Further delays and higher coal
costs in SEL; 2) Higher losses in VAL; 3) Higher costs in zinc; with higher copper
margins not compensating for the same. We believe that operational improvement
in power and aluminium businesses is needed for stock performance to improve.
YoY earnings growth will be strong in 2Q and 3Q but will slide 4QFY12 onwards.
We downgrade Sterlite to U-PF from O-PF.
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