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We build in JPM commodity forecasts, conservative volume and cost assumptions.
Our new Jun-12 PT of Rs165 (45% potential upside) does not account for
Rs135bn (Rs40/share) of investments in power and aluminum but builds in
attributable debt. On current LME prices and with new royalty regime (not our
base case), we believe STLT can still deliver EPS of Rs15 in FY13E. Key
investor issues are potential levering up of STLT balance sheet in any possible
re-structuring (negative in our view) and cash on the zinc sub not being
fungible except dividends.
Grade A zinc assets provide earnings visibility: STLT has fallen 39% YTD
v/s -38% for BSE METALS and -55% for parent VED. In our view, other than
global macro weakness in commodities and the India specific MMDR bill issue
(would impact on STLT EPS by 8% in FY13E mainly in the zinc sub), there
have been concerns on STLT’s power/aluminum segments given coal/bauxite
issues and potential flow-through for STLT’s balance sheet from parent VED’s
increasing leverage. In our view, even in the stressed zinc environment, STLT’s
grade A zinc assets (among the lowest cost in the world) in India, combined
with the copper smelting assets and overseas zinc assets, can deliver strong
earnings. While we expect power and aluminum assets to be loss making next
year, we do not anticipate additional funding support to power assets beyond
the current Rs53bn. So far management has stated that no additional funding
would be made beyond STLT's share in the ally segment.
…but investors more concerned on non zinc issues: We believe investors are
not willing to give full value to the India zinc sub earnings as the cash flows are
not perceived to be fungible. An increase in dividends would be positive in our
view. The power project ramp up has been impacted by delays and coal issues,
while VAL continues to remain near the top end of the global cost curve and at
current aluminum prices would be loss making at the EBITDA level (Q1 CoP
$2344/MT v/s LME of $2610). STLT has so far invested 32% of Rs300bn VAL
investment (combination of equity and debt). Key investor concerns remain a
potential re-structuring of assets and the subsequent impact on STLT balance
sheet. We believe at CMP of Rs113, STLT is trading at 3.7x FY13E
EV/EBITDA (with zero value for investments) and implies 4.2x at MTM LME
+ royalty impact. Cash flow generation from domestic and global zinc assets
and copper smelting is likely to remain strong, with significant volume
growth in lead and silver starting Q3FY12E.
Other key highlights from 20-F
a) Increasing strip ratio at key zinc mine of Rampura Agucha: While the
strip ratio in terms of waster per ton ore stood at 12.53 in FY11, STLT
expects this to increase to 14.2. STLT highlights that the expansion of the
mine from 5MT to 6.15MT has resulted in significant increase in the strip
ratio as ‘there is dimensional change in the pit'. Mine life for the key mine at
current production capacity stands at over 30 years (reserves stood at
69.7MT).
b) Overseas zinc asset details: Skorpion mine has a life up to 2015 and during
year ended Dec-2010, 1.55MT of ore at 11.1% zinc were mined with a strip
ratio of 6 tonnes, with the final products trucked to the port 300kms away.
On the Gamsberg project, STLT highlights a potential for producing in
excess of 0.4MT SHG zinc, though no timelines and cost details have been
given. Lisheen mine is expected to end by 2014.
c) BALCO bauxite mine details: The bauxite from BALCO's mines is moved
by trucks over a distance of 210KMs with the journey taking 6-7 hours. The
mine life at Manipat mine is 3.3 years from March-11 and 3 years for the
Bodai-Daldali mines. Total cost for mining and transportation of bauxite
from these mines stood at Rs1935/MT of bauxite. 65% of BALCO’s
thermal coal requirements are from SECL while the rest are sourced from
open market. Alumina was also imported at CIF prices of $360/MT in
FY11.
d) Comments on Investments in VAL: Regarding potential impairment of
investments in VAL- STLT highlights –‘Due to the ongoing delay in
obtaining approval for the Niyamgiri mines and expansion of the alumina
refinery, we have reviewed the carrying value of our investments in
Vedanta Aluminium for any impairment. We have concluded that no
impairment is necessary based on the availability of alternate sources to
obtain bauxite. We expect the necessary approvals for the expansion of
the alumina refinery in due course’. In our view in the near term,
impairment looks unlikely.
Looking at debt and guarantees closely
The 20-F filing includes a detailed entity wise break up of the consolidated debt in
Sterlite. Of the total debt outstanding, non-INR denominated debt is ~50% of the
total amount (including convertible). The bulk of this debt is in USD and in the form
of Buyer’s credit (~52% of the total FX loans) for BALCO and Power businesses.
At the consolidated level debt stood at Rs107bn as per our estimates including
convertibles. Total guarantees given out by STLT stood at Rs64bn of which Rs46bn
are on VAL’s behalf.
Valuation and key risks
We remain OW on the stock with a revised PT of Rs165 (Rs230 previously) based
on 5.8x FY13E EV/EBITDA. We reduce our multiple from 6.0x previously given the
increasing uncertainty. Key risks from here are a collapse in zinc prices and
regulatory uncertainty across business segments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We build in JPM commodity forecasts, conservative volume and cost assumptions.
Our new Jun-12 PT of Rs165 (45% potential upside) does not account for
Rs135bn (Rs40/share) of investments in power and aluminum but builds in
attributable debt. On current LME prices and with new royalty regime (not our
base case), we believe STLT can still deliver EPS of Rs15 in FY13E. Key
investor issues are potential levering up of STLT balance sheet in any possible
re-structuring (negative in our view) and cash on the zinc sub not being
fungible except dividends.
Grade A zinc assets provide earnings visibility: STLT has fallen 39% YTD
v/s -38% for BSE METALS and -55% for parent VED. In our view, other than
global macro weakness in commodities and the India specific MMDR bill issue
(would impact on STLT EPS by 8% in FY13E mainly in the zinc sub), there
have been concerns on STLT’s power/aluminum segments given coal/bauxite
issues and potential flow-through for STLT’s balance sheet from parent VED’s
increasing leverage. In our view, even in the stressed zinc environment, STLT’s
grade A zinc assets (among the lowest cost in the world) in India, combined
with the copper smelting assets and overseas zinc assets, can deliver strong
earnings. While we expect power and aluminum assets to be loss making next
year, we do not anticipate additional funding support to power assets beyond
the current Rs53bn. So far management has stated that no additional funding
would be made beyond STLT's share in the ally segment.
…but investors more concerned on non zinc issues: We believe investors are
not willing to give full value to the India zinc sub earnings as the cash flows are
not perceived to be fungible. An increase in dividends would be positive in our
view. The power project ramp up has been impacted by delays and coal issues,
while VAL continues to remain near the top end of the global cost curve and at
current aluminum prices would be loss making at the EBITDA level (Q1 CoP
$2344/MT v/s LME of $2610). STLT has so far invested 32% of Rs300bn VAL
investment (combination of equity and debt). Key investor concerns remain a
potential re-structuring of assets and the subsequent impact on STLT balance
sheet. We believe at CMP of Rs113, STLT is trading at 3.7x FY13E
EV/EBITDA (with zero value for investments) and implies 4.2x at MTM LME
+ royalty impact. Cash flow generation from domestic and global zinc assets
and copper smelting is likely to remain strong, with significant volume
growth in lead and silver starting Q3FY12E.
Other key highlights from 20-F
a) Increasing strip ratio at key zinc mine of Rampura Agucha: While the
strip ratio in terms of waster per ton ore stood at 12.53 in FY11, STLT
expects this to increase to 14.2. STLT highlights that the expansion of the
mine from 5MT to 6.15MT has resulted in significant increase in the strip
ratio as ‘there is dimensional change in the pit'. Mine life for the key mine at
current production capacity stands at over 30 years (reserves stood at
69.7MT).
b) Overseas zinc asset details: Skorpion mine has a life up to 2015 and during
year ended Dec-2010, 1.55MT of ore at 11.1% zinc were mined with a strip
ratio of 6 tonnes, with the final products trucked to the port 300kms away.
On the Gamsberg project, STLT highlights a potential for producing in
excess of 0.4MT SHG zinc, though no timelines and cost details have been
given. Lisheen mine is expected to end by 2014.
c) BALCO bauxite mine details: The bauxite from BALCO's mines is moved
by trucks over a distance of 210KMs with the journey taking 6-7 hours. The
mine life at Manipat mine is 3.3 years from March-11 and 3 years for the
Bodai-Daldali mines. Total cost for mining and transportation of bauxite
from these mines stood at Rs1935/MT of bauxite. 65% of BALCO’s
thermal coal requirements are from SECL while the rest are sourced from
open market. Alumina was also imported at CIF prices of $360/MT in
FY11.
d) Comments on Investments in VAL: Regarding potential impairment of
investments in VAL- STLT highlights –‘Due to the ongoing delay in
obtaining approval for the Niyamgiri mines and expansion of the alumina
refinery, we have reviewed the carrying value of our investments in
Vedanta Aluminium for any impairment. We have concluded that no
impairment is necessary based on the availability of alternate sources to
obtain bauxite. We expect the necessary approvals for the expansion of
the alumina refinery in due course’. In our view in the near term,
impairment looks unlikely.
Looking at debt and guarantees closely
The 20-F filing includes a detailed entity wise break up of the consolidated debt in
Sterlite. Of the total debt outstanding, non-INR denominated debt is ~50% of the
total amount (including convertible). The bulk of this debt is in USD and in the form
of Buyer’s credit (~52% of the total FX loans) for BALCO and Power businesses.
At the consolidated level debt stood at Rs107bn as per our estimates including
convertibles. Total guarantees given out by STLT stood at Rs64bn of which Rs46bn
are on VAL’s behalf.
Valuation and key risks
We remain OW on the stock with a revised PT of Rs165 (Rs230 previously) based
on 5.8x FY13E EV/EBITDA. We reduce our multiple from 6.0x previously given the
increasing uncertainty. Key risks from here are a collapse in zinc prices and
regulatory uncertainty across business segments.
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