Sterlite Industries -Q4 results highlight the leverage to coal (availability and cost); FY14-15E should be better than FY12-13:: JPMorgan

STLT delivered a strong beat across segments essentially driven by volumes and
cost (coal). While the overall operating environment has still not stabilized
(copper smelter is shut, while most new power and aluminum capacities are not
operating), we believe the worst is over in terms of regulatory headwinds. From
here the key re rating catalyst remains merger with SESA and subsequently a road
map to debt reduction. Operationally we expect copper smelter to restart in
H2FY14E, while the power segment should continue to ramp up. We remain OW.

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 Impressive Q4 beat…: The consolidated EBITDA (Rs33bn v/s JPMe Rs26bn)
and PAT (Rs19bn v/s JPMe Rs17bn) beat was driven by higher volume (zinc)
and lower costs (aluminum and power). CoP at the power segment declined
~21% q/q to Rs1.76/unit, while aluminum CoP also reduced q/q.
 …..Near term coal costs to inch up on seasonality, but volume growth
should also pick up: We do not expect STLT’s impressive Q4 cost
performance to sustain in the near term, as coal costs should move up. Supplies
from COAL India tend to decline in the April-Oct period, which also leads to an
upward movement in e-auction coal prices, and this should impact STLT. We
expect volume growth across zinc, power and aluminum as the new capacities
gradually enter production, though in FY14E, power and aluminum utilization
is likely remain sub optimal. However, the higher volumes especially in power,
should allow operating costs to reduce.
 Impressive performance at VAL even without alumina: VAL continues to
operate on bought out alumina, but cost management has been impressive, with
CoP steady now at ~$2000/T. On availability of captive bauxite and the Gram
Sabha issue, we are not very hopeful of a positive resolution given the history
of the entire situation, though a closure should allow VAL to pursue other
bauxite deposits for its refinery.
 Key issues ahead: a) resolution of the copper smelting issue. We expect
smelter to start in H2; b) merger with SESA (we expect merger to go through in
FY14E); c) ramp up of power segment from 50-55% PLF to 80-85%; d) start up
of power and aluminum capacities at BALCO
 Remain OW- Sharp underperformance v/s VED overdone: We value STLT
at 0.6x (merger ratio) of SESA STLT PT and translate into 5.9x FY15E
EV/EBITDA. STLT (-18%) and SESA (-19%) have sharply underperformed
parent VED YTD (+5%) as Indian MM equities have been hit by domestic
investor sell off. In our view the under performance is overdone, though is
unlikely to reverse till we see some of the above issues being resolved.