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Upgrade to Outperform
We cut Sterlite’s FY12-14 EPS by 13-16% factoring the revised base metal
price forecasts of CLSA’s resources team. Sterlite has been besieged by
multiple negative developments in virtually all businesses but we believe that
31% YTD stock price correction has priced in all these. Valuations at 0.8x
FY13 P/B look attractive given that ROEs are unlikely to be lower than midteens
due to low cost advantages in the zinc business, which contributes 69%
to earnings. Despite the sharp EPS cut, Sterlite still provides decent 17% EPS
CAGR over FY11-13. We upgrade Sterlite to O-PF with a target price of Rs150.
Sharp cut to zinc-lead price forecasts; modest cut to aluminium
CLSA’s resources team has cut CY11-13 price forecasts for zinc by 4-9%, lead by
6-12% and aluminium by 2-4%. This factors in a limited impact of a potential QE3
and gives a higher weight to market fundamentals. Our new CY11-12 zinc-lead
price forecasts are just 1-4% above LME spot prices but the new aluminium
forecasts are a higher 5-10% above spot. The cut is higher in case of zinc-lead
given weaker market fundamentals. In aluminium, we are more positive and
expect RMB appreciation and rising Chinese cost curve to boost prices.
Multiple negatives have impacted Sterlite’s stock in the last 12-18m
Sterlite Energy (SEL) has disappointed in the last 12m thanks to project delays,
slow ramp-up of commissioned units and coal un-availability. Costs have risen in
the aluminium business thanks to lack of captive bauxite as well as coal issues
and losses have widened in Vedanta Aluminium (VAL). Rising loans from Sterlite
to VAL have further increased concerns. Zinc business costs, too, have risen
sharply and have moved up to a structurally higher level.
Recent correction has priced in all this; risk-reward much better now
Sterlite provides consol ROEs of 15-16% over FY12-13 even after the sharp
earnings cut. This is primarily driven by the zinc business (69% of EPS), which
has significant low-cost advantages despite the rise in costs in the last 12m. Our
estimates adequately factor the project delays and cost issues in SEL and the
aluminium business. Moreover, power and aluminium together account for just
6% of earnings and any further cuts here will not impact consol EPS much. In this
context, current valuations at 0.8x FY13 P/B seem too harsh. Our revised SOTP
target price is Rs150 (Rs175 before), which implies 7.5x FY13 P/E and 1.0x FY13
P/B. At 17% CAGR over FY11-13, Sterlite’s earnings growth is superior to most of
its peers in the sector. If SEL gets its act together and achieves timely
commissioning and smooth ramp-up in balance units, part of the concerns on the
stock will get assuaged and multiples would improve. Any improvement in LME
prices post a potential third round of QE would be another catalyst for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Upgrade to Outperform
We cut Sterlite’s FY12-14 EPS by 13-16% factoring the revised base metal
price forecasts of CLSA’s resources team. Sterlite has been besieged by
multiple negative developments in virtually all businesses but we believe that
31% YTD stock price correction has priced in all these. Valuations at 0.8x
FY13 P/B look attractive given that ROEs are unlikely to be lower than midteens
due to low cost advantages in the zinc business, which contributes 69%
to earnings. Despite the sharp EPS cut, Sterlite still provides decent 17% EPS
CAGR over FY11-13. We upgrade Sterlite to O-PF with a target price of Rs150.
Sharp cut to zinc-lead price forecasts; modest cut to aluminium
CLSA’s resources team has cut CY11-13 price forecasts for zinc by 4-9%, lead by
6-12% and aluminium by 2-4%. This factors in a limited impact of a potential QE3
and gives a higher weight to market fundamentals. Our new CY11-12 zinc-lead
price forecasts are just 1-4% above LME spot prices but the new aluminium
forecasts are a higher 5-10% above spot. The cut is higher in case of zinc-lead
given weaker market fundamentals. In aluminium, we are more positive and
expect RMB appreciation and rising Chinese cost curve to boost prices.
Multiple negatives have impacted Sterlite’s stock in the last 12-18m
Sterlite Energy (SEL) has disappointed in the last 12m thanks to project delays,
slow ramp-up of commissioned units and coal un-availability. Costs have risen in
the aluminium business thanks to lack of captive bauxite as well as coal issues
and losses have widened in Vedanta Aluminium (VAL). Rising loans from Sterlite
to VAL have further increased concerns. Zinc business costs, too, have risen
sharply and have moved up to a structurally higher level.
Recent correction has priced in all this; risk-reward much better now
Sterlite provides consol ROEs of 15-16% over FY12-13 even after the sharp
earnings cut. This is primarily driven by the zinc business (69% of EPS), which
has significant low-cost advantages despite the rise in costs in the last 12m. Our
estimates adequately factor the project delays and cost issues in SEL and the
aluminium business. Moreover, power and aluminium together account for just
6% of earnings and any further cuts here will not impact consol EPS much. In this
context, current valuations at 0.8x FY13 P/B seem too harsh. Our revised SOTP
target price is Rs150 (Rs175 before), which implies 7.5x FY13 P/E and 1.0x FY13
P/B. At 17% CAGR over FY11-13, Sterlite’s earnings growth is superior to most of
its peers in the sector. If SEL gets its act together and achieves timely
commissioning and smooth ramp-up in balance units, part of the concerns on the
stock will get assuaged and multiples would improve. Any improvement in LME
prices post a potential third round of QE would be another catalyst for the stock.
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