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Power & Ali under pressure
We cut Sterlite’s FY12-14 EPS by 8-15% factoring in CLSA’s revised base
metal and currency forecasts. Global macro risks as well as concerns on the
viability of Vedanta Aluminium (VAL) and Sterlite Energy (SEL) continue to
weigh on Sterlite’s valuations. However at 0.75x FY13 P/B with mid-teens
ROEs, Sterlite is close to the valuation trough of FY09 and we believe that the
negatives are priced in. Any operational improvement in SEL will be a trigger
for the stock. We view Sterlite as relatively better placed than peers in the
event of another round of quantitative easing. Maintain O-PF.
Sterlite Energy likely to be loss-making for some time
SEL is operating its two commissioned units of 600MW each at just 40-50% PLF.
SEL is getting ~40% of its coal from linkage, 50% from e-auction and 10% from
imported coal, resulting in a high cost of Rs2.8-3.0/unit. We believe that SEL
would be making losses at PBT level while breaking even at EBITDA level. We see
risk of the linkage coal proportion falling once the 3rd and 4th units get
commissioned by end-FY12, resulting in higher costs and potentially wider losses.
SEL’s captive coal mine will eventually supply 40% of its coal needs but we see
risk of delays here and the period of coal shortage could last for the next 2-3
years. Given this, we see limited scope of the Rs40bn interest-free loan given by
Sterlite to SEL coming back in a hurry and now treat this amount as quasi-equity.
We now value SEL at 20% discount to invested capital of Rs52bn.
Aluminium business under pressure as well
With aluminium prices having come off and costs still high, VAL is likely to be lossmaking
over FY12-13. The captive power plants of both VAL and Balco would also
be facing the same coal issues as SEL worsening the cost structure. We continue
to treat the Rs100bn loan given by Sterlite to VAL as quasi-equity and assign zero
value to Sterlite’s investment in VAL.
Zinc business will do relatively better
We expect HZL to register 13% profit Cagr over FY11-13 even on our lower base
metal price forecasts boosted by higher volumes of zinc, lead and silver. Share of
silver in HZL’s EBITDA will rise to 32% by FY14 from 10% in FY11, which could
potentially improve multiples. HZL’s mining costs have been rising for the last six
quarters and this is a key metric to look out for in coming quarters.
Maintain O-PF; valuation close to FY09 trough
Sterlite offers respectable 13-15% ROEs over FY12-14 on our revised estimates
and we believe that valuations at 0.75x P/B are a tad harsh. We maintain O-PF on
Sterlite with a revised target price of Rs130.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power & Ali under pressure
We cut Sterlite’s FY12-14 EPS by 8-15% factoring in CLSA’s revised base
metal and currency forecasts. Global macro risks as well as concerns on the
viability of Vedanta Aluminium (VAL) and Sterlite Energy (SEL) continue to
weigh on Sterlite’s valuations. However at 0.75x FY13 P/B with mid-teens
ROEs, Sterlite is close to the valuation trough of FY09 and we believe that the
negatives are priced in. Any operational improvement in SEL will be a trigger
for the stock. We view Sterlite as relatively better placed than peers in the
event of another round of quantitative easing. Maintain O-PF.
Sterlite Energy likely to be loss-making for some time
SEL is operating its two commissioned units of 600MW each at just 40-50% PLF.
SEL is getting ~40% of its coal from linkage, 50% from e-auction and 10% from
imported coal, resulting in a high cost of Rs2.8-3.0/unit. We believe that SEL
would be making losses at PBT level while breaking even at EBITDA level. We see
risk of the linkage coal proportion falling once the 3rd and 4th units get
commissioned by end-FY12, resulting in higher costs and potentially wider losses.
SEL’s captive coal mine will eventually supply 40% of its coal needs but we see
risk of delays here and the period of coal shortage could last for the next 2-3
years. Given this, we see limited scope of the Rs40bn interest-free loan given by
Sterlite to SEL coming back in a hurry and now treat this amount as quasi-equity.
We now value SEL at 20% discount to invested capital of Rs52bn.
Aluminium business under pressure as well
With aluminium prices having come off and costs still high, VAL is likely to be lossmaking
over FY12-13. The captive power plants of both VAL and Balco would also
be facing the same coal issues as SEL worsening the cost structure. We continue
to treat the Rs100bn loan given by Sterlite to VAL as quasi-equity and assign zero
value to Sterlite’s investment in VAL.
Zinc business will do relatively better
We expect HZL to register 13% profit Cagr over FY11-13 even on our lower base
metal price forecasts boosted by higher volumes of zinc, lead and silver. Share of
silver in HZL’s EBITDA will rise to 32% by FY14 from 10% in FY11, which could
potentially improve multiples. HZL’s mining costs have been rising for the last six
quarters and this is a key metric to look out for in coming quarters.
Maintain O-PF; valuation close to FY09 trough
Sterlite offers respectable 13-15% ROEs over FY12-14 on our revised estimates
and we believe that valuations at 0.75x P/B are a tad harsh. We maintain O-PF on
Sterlite with a revised target price of Rs130.
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