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Sterlite Industries (STLT)
Metals & Mining
Zinc does well, other segments struggle. Sterlite’s reported 2QFY12 EBITDA of
Rs24.8 bn (+62.3% yoy, -10% qoq) was broadly in line. Net income of Rs9.9 bn (-1%
yoy, -39.1% qoq) was impacted by VAL and forex losses. Sterlite announced interim
dividend of Re1/share, a positive in our view. We find valuations of Sterlite attractive
and believe that concerns of viability of VAL project and fuel shortage for Sterlite Energy
(SEL) are built into the current market price. We have tweaked our EPS estimates lower
by 20.4% and11.8% for FY2012-13E and cut our TP to Rs165 (Rs185 earlier). BUY.
VAL and forex loss hurt net income; operational performance in line with our estimate
Sterlite’s reported 2QFY12 EBITDA of Rs24.8 bn (+62.3% yoy, -10% qoq) was in line with our
estimate of Rs24.5 bn. Performance was powered by zinc and copper segments, while aluminium
(major cost increase) and power segments were a drag. Net income of Rs9.9 bn (-39.1% qoq, -1%
yoy) was impacted by (1) Rs4.7 bn forex losses on MTM of FCCB and hedges undertaken for upstreaming
of cash from zinc international business and (2) Rs2.4 bn loss from consolidation of VAL
operations. VAL reported PBDT loss of Rs6.2 bn and net loss of Rs8.2 bn.
New projects fail to deliver; Sterlite Energy and VAL report losses
Lack of availability of raw materials is hurting new projects—(1) aluminium cost of production
(COP) of US$2,554/tonne was higher than LME aluminium price. COP includes impact of restart of
pots after outage in 1QFY12. VAL may convert part of the debt extended by Vedanta and Sterlite
into equity, and (2) SEL’s COP increased to Rs2.9/unit due to limited coal availability forcing power
plant to be run at sub-optimal level, and qoq unchanged PLF of 44%. Concern on coal availability
for SEL is unlikely to recede. We cut SEL FY2012-13E EBITDA estimates by 70.5% and 52.9%.
Balance sheet in good shape even after eliminating Hindustan Zinc cash; dividend payout increased
Sterlite has net debt of Rs82 bn after eliminating cash of HZ. Net debt/ EBITDA, ex-HZ operations,
is comfortable, in our view, as long as Sterlite does not increase loans extended to VAL. Sterlite did
not lend any cash to VAL in 2QFY12. On the positive side, Sterlite and Hindustan Zinc have
stepped up dividend payout. The dividend payout structure is tax efficient.
Cut estimate on lower commodity price assumption
We make a few changes to our estimates and factor in lower zinc-lead and aluminium price
forecasts and lower profitability of SEL for FY2012-14E. We lower our consolidated FY2012-13E
EPS estimates by 20.4% and 11.8% to Rs13.5 and Rs16.7 (Exhibit 3). We maintain our BUY rating
with a revised TP of Rs165/share (Rs185/share earlier) based on end-2013E financials. Sterlite stock
is trading at distressed levels with valuation for the business being justified on HZ fair value alone.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sterlite Industries (STLT)
Metals & Mining
Zinc does well, other segments struggle. Sterlite’s reported 2QFY12 EBITDA of
Rs24.8 bn (+62.3% yoy, -10% qoq) was broadly in line. Net income of Rs9.9 bn (-1%
yoy, -39.1% qoq) was impacted by VAL and forex losses. Sterlite announced interim
dividend of Re1/share, a positive in our view. We find valuations of Sterlite attractive
and believe that concerns of viability of VAL project and fuel shortage for Sterlite Energy
(SEL) are built into the current market price. We have tweaked our EPS estimates lower
by 20.4% and11.8% for FY2012-13E and cut our TP to Rs165 (Rs185 earlier). BUY.
VAL and forex loss hurt net income; operational performance in line with our estimate
Sterlite’s reported 2QFY12 EBITDA of Rs24.8 bn (+62.3% yoy, -10% qoq) was in line with our
estimate of Rs24.5 bn. Performance was powered by zinc and copper segments, while aluminium
(major cost increase) and power segments were a drag. Net income of Rs9.9 bn (-39.1% qoq, -1%
yoy) was impacted by (1) Rs4.7 bn forex losses on MTM of FCCB and hedges undertaken for upstreaming
of cash from zinc international business and (2) Rs2.4 bn loss from consolidation of VAL
operations. VAL reported PBDT loss of Rs6.2 bn and net loss of Rs8.2 bn.
New projects fail to deliver; Sterlite Energy and VAL report losses
Lack of availability of raw materials is hurting new projects—(1) aluminium cost of production
(COP) of US$2,554/tonne was higher than LME aluminium price. COP includes impact of restart of
pots after outage in 1QFY12. VAL may convert part of the debt extended by Vedanta and Sterlite
into equity, and (2) SEL’s COP increased to Rs2.9/unit due to limited coal availability forcing power
plant to be run at sub-optimal level, and qoq unchanged PLF of 44%. Concern on coal availability
for SEL is unlikely to recede. We cut SEL FY2012-13E EBITDA estimates by 70.5% and 52.9%.
Balance sheet in good shape even after eliminating Hindustan Zinc cash; dividend payout increased
Sterlite has net debt of Rs82 bn after eliminating cash of HZ. Net debt/ EBITDA, ex-HZ operations,
is comfortable, in our view, as long as Sterlite does not increase loans extended to VAL. Sterlite did
not lend any cash to VAL in 2QFY12. On the positive side, Sterlite and Hindustan Zinc have
stepped up dividend payout. The dividend payout structure is tax efficient.
Cut estimate on lower commodity price assumption
We make a few changes to our estimates and factor in lower zinc-lead and aluminium price
forecasts and lower profitability of SEL for FY2012-14E. We lower our consolidated FY2012-13E
EPS estimates by 20.4% and 11.8% to Rs13.5 and Rs16.7 (Exhibit 3). We maintain our BUY rating
with a revised TP of Rs165/share (Rs185/share earlier) based on end-2013E financials. Sterlite stock
is trading at distressed levels with valuation for the business being justified on HZ fair value alone.
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