Sterlite Industries -- Galvanising growth, more options :: Macquarie Research

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Sterlite Industries
Galvanising growth, more options
Event
 In-line results but solid growth: Sterlite reported Q1 results which were in
line with our estimates on operating metrics. This quarter the company saw
pressure on power and VAL due to higher costs however, and the zinc
business led the growth. We maintain Outperform but marginally reduce our
TP from Rs234 to Rs217 to account for higher costs in the power business.
Impact
 Strong results for 1QFY12: Net sales at Rs98.2bn were up 66% YoY, largely
driven by the zinc business. EBITDA at Rs27.2bn rose 87% YoY as margins
in the zinc business remained strong and its contribution increased with the
acquisition of Anglo’s zinc assets. PAT at Rs16.4bn was up 63% YoY.
 Zinc business – key driver of earnings: Sterlite’s zinc business contributed
about Rs20.8bn, or 75%, of total EBITDA. The Anglo business saw the first
quarter of full operations and contributed Rs5.2bn to EBITDA in 1Q. We
expect a further increase here as Hindustan Zinc ramps up its 100kt lead
smelter and reaches full capacity at its SK mine.
 Power business – struggling with higher costs: The power business
contributed 6% of EBITDA this quarter. High coal costs and subdued power
rates mean that earnings growth would be muted even with a doubling of
capacity this year to 2400MW.
 Copper business – stable returns: The copper smelting business comprised
12% of EBITDA, profitability improved marginally as TC/RCs improved, and
so did product credit. Given uncertainty over the environmental clearance, we
have pushed out the expansion to double capacity to FY14.
 Aluminium business – provides options: The aluminium business was just
7% of EBITDA. While profitability is low with power rates coming under
pressure in the domestic market, it provides a good option with aluminium
prices remaining high to start some of these capacities. We wait to see if
management can do some forward selling of aluminium to lock in some
margins.
Earnings and target price revision
 We have reduced our estimates by 6%, 14% and 11% for FY12, FY13 and
FY14 respectively. TP lowered from Rs234 to Rs217.
Price catalyst
 12-month price target: Rs217.00 based on a Sum of Parts methodology.
 Catalyst: Strong earnings growth and possible allocation of bauxite mine.
Action and recommendation
 Low valuation and can see triggers: Despite all odds, Sterlite appears well
on track to report a 30% earnings CAGR over the next 2 years. It is trading at
8.0x FY12E PER, a discount to its peers. Adding to this the possibility of it
getting the bauxite mine, it becomes even more attractive. Maintain
Outperform.