Sterlite Industries
Neutral
Target Price: Rs115
CMP: Rs121.5
Downside: 5.3%
Q3FY13 to be unexpectedly weak and below expectations
We see unexpectedly weak results (contrary to our earlier expectations) from both Sterlite and HZL for Q3FY13E despite better LME realizations on both YoY and QoQ basis and this could surprise the street negatively in our view. We expect subdued results on account of i) higher proportion of custom smelting volumes in HZL for lead & silver (~18-20% custom volumes in refined sales) and low refined zinc volumes (flat QoQ at 1.65 lakh tonne), ii) lower merchant power volumes from SEL (down by ~14% QoQ at 1.66bn units) due to continuation of evacuation issues, iii) higher losses from VAL operations due to low captive alumina & bauxite availability and negative forex fluctuations and iv) higher depreciation and negative impact of rupee depreciation resulting in reduced PAT on a group basis for Sterlite. The stock has rallied smartly in the recent few weeks and is trading at Rs121, well above our target price of Rs115. We have been maintaining our positive view on the stock but expect upside to remain capped at current levels in the wake of our weak results expectations (well below current Bloomberg consensus) and slow progress on commissioning of expansion projects across assets.
Updates on various operations and our estimates for Q3FY13E are as follows:-
Zinc Operations (India)
m MIC volumes for zinc & lead are expected to show strong growth but due to accumulation of custom concentrates for silver & lead during previous quarters, custom smelting volumes are expected to account for ~18-20% of refined volumes in Q3FY13E. Zinc refined volumes are expected to be flat QoQ at 1.65 lakh tonne due to lower output from the smelters as debottlenecking is being carried out. We see zinc volumes to disappoint and remain below company’s FY13E guidance.m Despite higher LME prices, EBITDA margin expected to remain squeezed due to higher custom smelting volumes and lower zinc volumes.
m Mining expansions at Kayar and Rampura Agucha underground mines have yielded only developmental ore as now and commercial production on a material basis is expected from FY14 only.
m Our estimates for EBITDA and PAT for HZL remain well below (~10-12% lower) current Bloomberg consensus
Zinc International
m Expected to see QoQ volume drop of ~12% as per guidance of lower grades and mining plan for FY13E. MIC volumes for Q3FY13E expected at 1 lakh tonne.
Aluminium Operations
m BALCO – Aluminium volumes expected at ~60k tonne and profitability seen flat QoQ. The 300 MW CPP has not been commissioned still due to regulatory approval delays and commissioning of the associated smelter is expected to be delayed further. Sterlite has spent ~US$1.4bn (out of total capex of US$1.8bn) for smelter and 1200 MW CPP expansion at BALCO till date.
m VAL – Lower alumina production and other cost increase expected to result in lower QoQ EBITDA. PAT is expected to be significantly affected by negative forex movements. Attributable loss from VAL for Sterlite in Q3FY13E expected to be at ~Rs1.6bn.
Power Operations (SEL)
m Merchant power sales are expected to be lower by ~14% QoQ at 1.67bn units due to evacuation limitations post the grid failure in end August. SEL continues to operate at a PLF of below 45% due to evacuation constraint. Realizations are expected to be lower sequentially whereas costs higher due to low PLF.
Copper Operations
m Flat performance seen on a sequential basis and no major improvements in Tc/Rc and net COP on a QoQ basis.
Consolidated Operations
m Consolidated result for Sterlite is expected to remain muted for Q3FY13E and progress on commissioning of various expansion projects remains very slow. We see consolidated EBITDA margin of 22.8%, flat YoY. Negative impact of forex and higher depreciation is expected to keep group PAT subdued. Our estimates for EBITDA and adj-PAT for Sterlite are below Bloomberg consensus by 12% and 21% respectively. Similarly our EBITDA and PAT estimates for HZL are also well below current Bloomberg consensus estimates. So, we believe that muted performance could surprise the street negatively.
Thanks & Regards,
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