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Sterlite's cons. 2Q12 ebitda of Rs24.8bn (+68%yoy and -10%qoq) was 13% below our estimates.
Crucial decisions with respect to starting new capacities add to uncertainty over profitability as
cost dynamics have undergone a drastic change in recent weeks. Maintain BUY
Sterlite 2Q12 Consolidated earnings analysis
Cons. net income at Rs101.95bn (+3%qoq and +69%yoy) was inline with expectations. Cons.
ebitda at Rs24.84bn (-10%qoq and +68%yoy) was 13% below expectations. Adj. PAT at
Rs13.71bn (-16%qoq and +36%yoy) was 18% below exp. Reported results were impacted by
a foreign exchange loss of Rs4.66bn. Also, the interest costs have surged during the quarter
from nil last year and +105%qoq to Rs3.55bn and were 95% above our expectations. Results
were below exp driven by Rs1.5bn miss on Hindustan Zinc (HZ) earnings and Rs1.8bn
increase in interest exp.
Segmental income analysis: Aluminium and power business take a hit
The overall business mix has turned very heavy toward zinc. Zinc business now contributes
81% to the total EBIT up from 76.6%qoq and 74%yoy. The aluminium business has suffered
a sharp erosion in cost competitiveness due to increasing reliance on external sources of raw
materials. Also, the power business has taken significantly longer gestation period and
sourcing of coal continues to remain a concern.
Copper business: Copper business EBIT at Rs3.09bn (+6%qoq and +96%yoy) was 3% above
exp. Cost of copper smelting was -3.7c/lb compared to 13.9c/lb in the previous quarter and
7.3c/lb last year, due to higher prices of by-products and improved metal recovery.
Aluminium business: Aluminium business EBIT at Rs0.77bn was (-95%qoq and -94%yoy)
and 95% below exp. The BALCO (51% sub) aluminium business suffered a twin impact of
higher cost of raw materials and lower realizations. The cost of production rose 8%qoq and
22%yoy to US$2,133/t. Vedanta Aluminium (VAL), a 30% associate company reported an
alumina production of 228kt +2%qoq and +21.9%yoy. Aluminium production however fell by
21%qoq and 8.2%yoy due to pot outage at the 500kt Jharsuguda-I smelter. Alumina cost of
production increased by 9.7%qoq and 16.3% yoy to US$381/t. Aluminium cost of production
also increased by 9%qoq and 37.8%yoy.
Overall zinc business EBIT at Rs16.5bn was (-9%qoq and +65%yoy) and 13% below exp.
The international zinc business production was 114kt was down by 4%qoq and yoy. The
international zinc business PBDT rose by 2.5%qoq and 1.5%yoy. The cost of production
remained contained at $1,189/t.
Power business EBIT at Rs5.28bn (-9%qoq and -7%yoy) was and 45% below exp. The power
business recorded total volumes of 1.65bn units up 2.3%yoy and 3.4 times yoy. However, the
cost of production has also surged to Rs2.7pu +4%qoq and 50%yoy.
Other EBIT at Rs2.82bn (+74%qoq and +141%yoy) was 117% above exp. The earnings
surge has been as a result of higher by-product prices, which have remained volatile.
Status of expansions
Profitability of future expansion is now crucially linked to availability of captive bauxite and
coal. The allocation of the Niyamgiri mines continue to remain in limbo.
Aluminium business: The first metal tapping of the new 325kt aluminium smelter at BALCO is
expected in 4Q12. The associated 1,200MW captive power plant is expected to commence
power generation in 3Q12. The 1.25mt Jharsuguda-II smelter at VAL is in the final stages of
completion and management is not yet decided whether to commence production at this
stage.
Zinc business: The 100kt Dariba lead smelter was commissioned during the quarter. The new
350kt silver refinery is expected to start in 3Q12.
Power business: The remaining 2 units of the four units of the 2,400MW Jharsuguda power
plant is expected to be synchronized in 3Q and 4Q12.
Coal blocks: Management informed that the BALCO's block is gearing for getting the
environmental clearance next month and could likely start production in 1Q12. This mines are
crucial for sustainable profitability.
Our views and outlook
The aluminium business is at a crucial juncture and access to captive raw material sources of
both bauxite and coal would be essential for profitability. About 1.6mt of new aluminium
capacity commissioning is on the anvil and could involve additional Rs15bn cash outflow on
account of interest alone.
Although the balance-sheet remains comfortable with net cash position of Rs77.5bn it has
fallen by 50%yoy due to step up in investments. Also, with the expected commissioning of the
VAL 1.25mt aluminium smelter, the cash outflow on account of interest payments could
increase substantially. Also, we note that if we exclude the cash in Hindustan Zinc (HZ), a
64.9% owned subsidiary, the actual access to cash is low.
The earnings outlook for 3Q12 is uncertain due to i) a 16% drop in zinc prices and ii) a 12.5%
drop in aluminium prices over the last few weeks. We estimate the EBIT could drop by 16.9%
in 3Q12 over 2Q12 if we assume a 5% drop in Ebitda/t for the zinc and aluminium
businesses.
Valuations: Assuming current commodity prices of US$1,850/t for zinc, US$2,000/t for lead
and US$30/oz for silver and a complete write-down of aluminium business investments and
50% write-down in the value of the Sterlite Energy business, we arrive at a fair value of
Rs166/share. However, valuations could drop further if we factor the following: i) The mining
bill, which has got cabinet approval, could double the existing royalty payments and have an
additional impact of 11-15% of the earnings for HZ and ii) complicated holding structure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite's cons. 2Q12 ebitda of Rs24.8bn (+68%yoy and -10%qoq) was 13% below our estimates.
Crucial decisions with respect to starting new capacities add to uncertainty over profitability as
cost dynamics have undergone a drastic change in recent weeks. Maintain BUY
Sterlite 2Q12 Consolidated earnings analysis
Cons. net income at Rs101.95bn (+3%qoq and +69%yoy) was inline with expectations. Cons.
ebitda at Rs24.84bn (-10%qoq and +68%yoy) was 13% below expectations. Adj. PAT at
Rs13.71bn (-16%qoq and +36%yoy) was 18% below exp. Reported results were impacted by
a foreign exchange loss of Rs4.66bn. Also, the interest costs have surged during the quarter
from nil last year and +105%qoq to Rs3.55bn and were 95% above our expectations. Results
were below exp driven by Rs1.5bn miss on Hindustan Zinc (HZ) earnings and Rs1.8bn
increase in interest exp.
Segmental income analysis: Aluminium and power business take a hit
The overall business mix has turned very heavy toward zinc. Zinc business now contributes
81% to the total EBIT up from 76.6%qoq and 74%yoy. The aluminium business has suffered
a sharp erosion in cost competitiveness due to increasing reliance on external sources of raw
materials. Also, the power business has taken significantly longer gestation period and
sourcing of coal continues to remain a concern.
Copper business: Copper business EBIT at Rs3.09bn (+6%qoq and +96%yoy) was 3% above
exp. Cost of copper smelting was -3.7c/lb compared to 13.9c/lb in the previous quarter and
7.3c/lb last year, due to higher prices of by-products and improved metal recovery.
Aluminium business: Aluminium business EBIT at Rs0.77bn was (-95%qoq and -94%yoy)
and 95% below exp. The BALCO (51% sub) aluminium business suffered a twin impact of
higher cost of raw materials and lower realizations. The cost of production rose 8%qoq and
22%yoy to US$2,133/t. Vedanta Aluminium (VAL), a 30% associate company reported an
alumina production of 228kt +2%qoq and +21.9%yoy. Aluminium production however fell by
21%qoq and 8.2%yoy due to pot outage at the 500kt Jharsuguda-I smelter. Alumina cost of
production increased by 9.7%qoq and 16.3% yoy to US$381/t. Aluminium cost of production
also increased by 9%qoq and 37.8%yoy.
Overall zinc business EBIT at Rs16.5bn was (-9%qoq and +65%yoy) and 13% below exp.
The international zinc business production was 114kt was down by 4%qoq and yoy. The
international zinc business PBDT rose by 2.5%qoq and 1.5%yoy. The cost of production
remained contained at $1,189/t.
Power business EBIT at Rs5.28bn (-9%qoq and -7%yoy) was and 45% below exp. The power
business recorded total volumes of 1.65bn units up 2.3%yoy and 3.4 times yoy. However, the
cost of production has also surged to Rs2.7pu +4%qoq and 50%yoy.
Other EBIT at Rs2.82bn (+74%qoq and +141%yoy) was 117% above exp. The earnings
surge has been as a result of higher by-product prices, which have remained volatile.
Status of expansions
Profitability of future expansion is now crucially linked to availability of captive bauxite and
coal. The allocation of the Niyamgiri mines continue to remain in limbo.
Aluminium business: The first metal tapping of the new 325kt aluminium smelter at BALCO is
expected in 4Q12. The associated 1,200MW captive power plant is expected to commence
power generation in 3Q12. The 1.25mt Jharsuguda-II smelter at VAL is in the final stages of
completion and management is not yet decided whether to commence production at this
stage.
Zinc business: The 100kt Dariba lead smelter was commissioned during the quarter. The new
350kt silver refinery is expected to start in 3Q12.
Power business: The remaining 2 units of the four units of the 2,400MW Jharsuguda power
plant is expected to be synchronized in 3Q and 4Q12.
Coal blocks: Management informed that the BALCO's block is gearing for getting the
environmental clearance next month and could likely start production in 1Q12. This mines are
crucial for sustainable profitability.
Our views and outlook
The aluminium business is at a crucial juncture and access to captive raw material sources of
both bauxite and coal would be essential for profitability. About 1.6mt of new aluminium
capacity commissioning is on the anvil and could involve additional Rs15bn cash outflow on
account of interest alone.
Although the balance-sheet remains comfortable with net cash position of Rs77.5bn it has
fallen by 50%yoy due to step up in investments. Also, with the expected commissioning of the
VAL 1.25mt aluminium smelter, the cash outflow on account of interest payments could
increase substantially. Also, we note that if we exclude the cash in Hindustan Zinc (HZ), a
64.9% owned subsidiary, the actual access to cash is low.
The earnings outlook for 3Q12 is uncertain due to i) a 16% drop in zinc prices and ii) a 12.5%
drop in aluminium prices over the last few weeks. We estimate the EBIT could drop by 16.9%
in 3Q12 over 2Q12 if we assume a 5% drop in Ebitda/t for the zinc and aluminium
businesses.
Valuations: Assuming current commodity prices of US$1,850/t for zinc, US$2,000/t for lead
and US$30/oz for silver and a complete write-down of aluminium business investments and
50% write-down in the value of the Sterlite Energy business, we arrive at a fair value of
Rs166/share. However, valuations could drop further if we factor the following: i) The mining
bill, which has got cabinet approval, could double the existing royalty payments and have an
additional impact of 11-15% of the earnings for HZ and ii) complicated holding structure.
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