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UBS Investment Research
Sterlite Industries
H ZL Q2 marginally lower
Event: Results lower due to net sales; Change in dividend policy positive
Pre-ex PAT of Rs13.6bn (-9%QoQ, +40%YoY) and EBITDA of Rs14.2bn (-9%,
+31%YoY) was lower than UBS-e of Rs14.3bn/Rs15.1bn. Net Sales of Rs25.9bn
(-8%QoQ, +20%YoY) was lower than UBS-e/consensus estimate of
Rs27.5bn/Rs28.4bn. EBITDA margin was inline at 54.8%. HZL announced interim
dividend of Rs1.5/share (Rs1 in FY11) which equals 22% of 1H PAT and payout
from now will be on percentage of profit. Historically payout has been c7%.
Impact: Marginal impact of Q2 on Sterlite; Cash to Sterlite will increase
Sterlite owns 65% in HZL. HZL contributed 70%/63% of Sterlite’s consol PAT for
FY10/FY11. Though results are marginally lower than estimates we believe it will
have a negligible impact on Sterlite. Change in dividend policy is positive for
Sterlite. We est. Sterlite will get cUS$178/157mn in dividends at 20% payout in
FY12/13 from HZL (cRs3 /share of Sterlite).
Action: Reiterate Buy on Sterlite, positives outweigh regulatory overhang
We believe Sterlite is attractive at current levels given triggers such as: 1) strong
earnings momentum from existing operations (zinc/lead/silver volume growth in
FY12 in HZL) 2) consolidation of earnings from Anglo Zinc 3) attractive
valuations. HZL has cash/investments of US$3.2bn (Rs162.29bn)
Valuation: Buy rating and price target of Rs215.00
We value Sterlite’s key businesses (copper, Zinc/HZL, Balco) on March 2013E
EV/EBITDA of 5.5x (average of last two cycles) and investments at book value.
HZL contributes Rs120/share to our target price of Sterlite (57% of target price).
Key takeaways from the conference call
1. Lead Smelter & Silver refinery:
100ktpa Dariba smelter has been commissioned, incremental FY12 Lead
production of 40kt can be expected from this smelter. The smelter is
currently in ramp up stage and management is confident of exiting FY12 at
close to 90% of rated capacity.
The Sindesar Khurd mine ramp up is also progressing as per plan.
Once the Dariba smelter is fully ramped up, the total Lead capacity will be
185 ktpa. HZL will fall short of 10-15kt of Lead concentrate (MIC basis),
which will have to be imported, in order to fully utilize the available smelter
capacity.
Alongside Dariba smelter ramp up, the 350 tpa silver refinery (which will be
commissioned in Q3), will also be ramped up. In FY13 the management
expects to produce c450 tons of refined silver (UBS-e 300 tons).
2. Cash cost of production
Q2 CoP is US$847/t vs US$870/t in Q1. Management expects this to come
down further over coming quarters due to strong cost control initiatives.
3. Concentrate Sales:
Management doesn't intend to sell Zn/Lead concentrate, but when
concentrate production is significantly higher than available refining capacity
concentrate sales will be considered. In this quarter there was no lead
concentrate sale (c5000t in Q1FY12)
4. Update on Kayar mine (upcoming project):
The R&R for the mine is 11mt; ground breaking has begun. Management
expects to produce 1mt of ore p.a.; cash cost will not be much higher than the
existing US$850/t despite it being an underground mine.
5. Change in dividend policy
HZL announced a dividend pay out of 20% this quarter which is the highest
ever. The board has decided to move to a percentage pay out method from
the earlier progressive method. The dividend payout for FY11 was Rs1/sh vs
Rs1.5/sh in this quarter - equals 22% of 1H PAT. Historically payout has
been c7%.
We estimate Sterlite will get cUS$178/157mn in dividends at 20% payout in
FY12/13 from HZL (cRs3 /share of Sterlite)
6. Anglo Zinc Assets
Initially Anglo Zinc assets were considered to be bought within HZL, but as
the move didn't receive board approval, they were bought by Sterlite
Industries (HZL's parent). HZL has a strong liquidity position of cUS$3.2bn.
In response to a question from an analyst as to whether these assets will be
bought from Sterlite into the books of HZL, management denied any such
plans now.
Sterlite Industries
Sterlite Industries, the flagship of the Agarwal group, owns a 400ktpa copper
smelter in Tuticorin, India. It is the holding company for Hindustan Zinc (HZL,
with a 65% stake), Balco (51%), Copper Mines of Tasmania (CMT, 100%), and
Sterlite Power (100%) within the Vedanta group. HZL had 411ktps zinc
smelting capacity at end-FY07, which the company expects to raise to 669ktpa
by June 2008. Balco has increased its aluminium smelting capacity from
135ktpa to 345ktpa. Sterlite is setting up a 2,400 MW merchant power plant that
should start operations by December 2009. Sterlite holds 30% of Vedanta
Alumina.
Statement of Risk
We believe a sharp fall in zinc prices, which are linked to global economic
growth, would be the key risk factor for Sterlite. The company may not, for
whatever reason, be able to acquire the government stake in HZL and/or
BALCO, which could affect the consolidation of operations into the future.
Disruptions in power supply could lead to delays in projects and/or increases in
capex requirements.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sterlite Industries
H ZL Q2 marginally lower
Event: Results lower due to net sales; Change in dividend policy positive
Pre-ex PAT of Rs13.6bn (-9%QoQ, +40%YoY) and EBITDA of Rs14.2bn (-9%,
+31%YoY) was lower than UBS-e of Rs14.3bn/Rs15.1bn. Net Sales of Rs25.9bn
(-8%QoQ, +20%YoY) was lower than UBS-e/consensus estimate of
Rs27.5bn/Rs28.4bn. EBITDA margin was inline at 54.8%. HZL announced interim
dividend of Rs1.5/share (Rs1 in FY11) which equals 22% of 1H PAT and payout
from now will be on percentage of profit. Historically payout has been c7%.
Impact: Marginal impact of Q2 on Sterlite; Cash to Sterlite will increase
Sterlite owns 65% in HZL. HZL contributed 70%/63% of Sterlite’s consol PAT for
FY10/FY11. Though results are marginally lower than estimates we believe it will
have a negligible impact on Sterlite. Change in dividend policy is positive for
Sterlite. We est. Sterlite will get cUS$178/157mn in dividends at 20% payout in
FY12/13 from HZL (cRs3 /share of Sterlite).
Action: Reiterate Buy on Sterlite, positives outweigh regulatory overhang
We believe Sterlite is attractive at current levels given triggers such as: 1) strong
earnings momentum from existing operations (zinc/lead/silver volume growth in
FY12 in HZL) 2) consolidation of earnings from Anglo Zinc 3) attractive
valuations. HZL has cash/investments of US$3.2bn (Rs162.29bn)
Valuation: Buy rating and price target of Rs215.00
We value Sterlite’s key businesses (copper, Zinc/HZL, Balco) on March 2013E
EV/EBITDA of 5.5x (average of last two cycles) and investments at book value.
HZL contributes Rs120/share to our target price of Sterlite (57% of target price).
Key takeaways from the conference call
1. Lead Smelter & Silver refinery:
100ktpa Dariba smelter has been commissioned, incremental FY12 Lead
production of 40kt can be expected from this smelter. The smelter is
currently in ramp up stage and management is confident of exiting FY12 at
close to 90% of rated capacity.
The Sindesar Khurd mine ramp up is also progressing as per plan.
Once the Dariba smelter is fully ramped up, the total Lead capacity will be
185 ktpa. HZL will fall short of 10-15kt of Lead concentrate (MIC basis),
which will have to be imported, in order to fully utilize the available smelter
capacity.
Alongside Dariba smelter ramp up, the 350 tpa silver refinery (which will be
commissioned in Q3), will also be ramped up. In FY13 the management
expects to produce c450 tons of refined silver (UBS-e 300 tons).
2. Cash cost of production
Q2 CoP is US$847/t vs US$870/t in Q1. Management expects this to come
down further over coming quarters due to strong cost control initiatives.
3. Concentrate Sales:
Management doesn't intend to sell Zn/Lead concentrate, but when
concentrate production is significantly higher than available refining capacity
concentrate sales will be considered. In this quarter there was no lead
concentrate sale (c5000t in Q1FY12)
4. Update on Kayar mine (upcoming project):
The R&R for the mine is 11mt; ground breaking has begun. Management
expects to produce 1mt of ore p.a.; cash cost will not be much higher than the
existing US$850/t despite it being an underground mine.
5. Change in dividend policy
HZL announced a dividend pay out of 20% this quarter which is the highest
ever. The board has decided to move to a percentage pay out method from
the earlier progressive method. The dividend payout for FY11 was Rs1/sh vs
Rs1.5/sh in this quarter - equals 22% of 1H PAT. Historically payout has
been c7%.
We estimate Sterlite will get cUS$178/157mn in dividends at 20% payout in
FY12/13 from HZL (cRs3 /share of Sterlite)
6. Anglo Zinc Assets
Initially Anglo Zinc assets were considered to be bought within HZL, but as
the move didn't receive board approval, they were bought by Sterlite
Industries (HZL's parent). HZL has a strong liquidity position of cUS$3.2bn.
In response to a question from an analyst as to whether these assets will be
bought from Sterlite into the books of HZL, management denied any such
plans now.
Sterlite Industries
Sterlite Industries, the flagship of the Agarwal group, owns a 400ktpa copper
smelter in Tuticorin, India. It is the holding company for Hindustan Zinc (HZL,
with a 65% stake), Balco (51%), Copper Mines of Tasmania (CMT, 100%), and
Sterlite Power (100%) within the Vedanta group. HZL had 411ktps zinc
smelting capacity at end-FY07, which the company expects to raise to 669ktpa
by June 2008. Balco has increased its aluminium smelting capacity from
135ktpa to 345ktpa. Sterlite is setting up a 2,400 MW merchant power plant that
should start operations by December 2009. Sterlite holds 30% of Vedanta
Alumina.
Statement of Risk
We believe a sharp fall in zinc prices, which are linked to global economic
growth, would be the key risk factor for Sterlite. The company may not, for
whatever reason, be able to acquire the government stake in HZL and/or
BALCO, which could affect the consolidation of operations into the future.
Disruptions in power supply could lead to delays in projects and/or increases in
capex requirements.
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