Power operations surprise positively,
overhangs of project delays and debt remain
For the proposed Sesa Sterlite group (expected to be in place soon),
operational performance surprised positively again on a sequential
basis with i) higher earnings from domestic zinc operations on the
back of solid 27% YoY increase in MIC volumes, ii) higher volumes
(up ~26% QoQ) from merchant power division at SEL with better
realizations at ~Rs3.5/unit, iii) lower cost performance from VAL and
better metal premiums from aluminium operations. Positive
developments were mainly from merchant power operations with
PLF guidance of 60-70% for all four units, guidance of 15% YoY
growth in mined metal output at HZL being maintained and
visibility on restart of iron ore operations of Sesa Goa at Karnataka.
We were negatively surprised by further delay in 325ktpa smelter
commissioning at BALCO along with the delay in receiving
approvals for operational startup of 1200 MW power plant and in
starting production from the captive coal block (now put off to
FY15E). We remain concerned on long term volumes and
profitability of VAL (which operates without captive assets in
bauxite and alumina and will become the 100% subsidiary of the
merged entity) and continuation of funding for VAL’s losses from
standalone operations (additional Rs50bn lent by SIIL to VAL during
the quarter). We continue to see the merger offering limited
benefits to the consolidated entity on account of its huge debt and
skewed EBITDA profile (~70% of group EBITDA comes from HZL and
Cairn whose cash fungibility does not exist with the group) and see
HZL stake buyout as a key event for the entity to have better cash
flow and stable operations.
We have used FY15E EV/EBITDA valuation (see table below) to arrive
at a SOTP fair value of Rs157 for Sesa Sterlite and corresponding fair
value of Rs94 for Sterlite (based on 0.6x Sesa Sterlite value). We
maintain our Buy rating on both the stocks with reduced target
prices. Possible stake buyout in HZL and BALCO by the group from
the GoI could lead to material upgrades in our target prices.
��
overhangs of project delays and debt remain
For the proposed Sesa Sterlite group (expected to be in place soon),
operational performance surprised positively again on a sequential
basis with i) higher earnings from domestic zinc operations on the
back of solid 27% YoY increase in MIC volumes, ii) higher volumes
(up ~26% QoQ) from merchant power division at SEL with better
realizations at ~Rs3.5/unit, iii) lower cost performance from VAL and
better metal premiums from aluminium operations. Positive
developments were mainly from merchant power operations with
PLF guidance of 60-70% for all four units, guidance of 15% YoY
growth in mined metal output at HZL being maintained and
visibility on restart of iron ore operations of Sesa Goa at Karnataka.
We were negatively surprised by further delay in 325ktpa smelter
commissioning at BALCO along with the delay in receiving
approvals for operational startup of 1200 MW power plant and in
starting production from the captive coal block (now put off to
FY15E). We remain concerned on long term volumes and
profitability of VAL (which operates without captive assets in
bauxite and alumina and will become the 100% subsidiary of the
merged entity) and continuation of funding for VAL’s losses from
standalone operations (additional Rs50bn lent by SIIL to VAL during
the quarter). We continue to see the merger offering limited
benefits to the consolidated entity on account of its huge debt and
skewed EBITDA profile (~70% of group EBITDA comes from HZL and
Cairn whose cash fungibility does not exist with the group) and see
HZL stake buyout as a key event for the entity to have better cash
flow and stable operations.
We have used FY15E EV/EBITDA valuation (see table below) to arrive
at a SOTP fair value of Rs157 for Sesa Sterlite and corresponding fair
value of Rs94 for Sterlite (based on 0.6x Sesa Sterlite value). We
maintain our Buy rating on both the stocks with reduced target
prices. Possible stake buyout in HZL and BALCO by the group from
the GoI could lead to material upgrades in our target prices.
All eyes on restart of Karnataka operations
Sesa Goa’s iron ore operations continued to remain closed during Q1Y14E
and as a result the company suffered EBITDA loss of ~Rs428mn which was
lower QoQ on account of higher volumes from value addition business of pig
iron and coke. Pig iron and coke sales volumes saw impressive YoY increase
of 180% and 57% respectively, but lower margins due to depressed pricing
prevented overall fixed costs to recover completely. PAT was reported at
Rs4.1bn including profit from Cairn of Rs6.2bn and forex loss of ~Rs992mn.
Restart of Karnataka operations is keenly watched out for, but we remain
cautious on the overall prospects of the company with Goa operations’
restart visibility remaining low and Karnataka restart dependent on grant of
various approvals on time. We recommend Buy with a target price of Rs157
based on the SOTP valuation of the proposed Sesa Sterlite group.
Iron ore division remains closed: Iron ore operations remained closed in both
Goa and Karnataka while pig iron and coke divisions delivered sales volumes of
126579 tonne and 83316 tonne, up by 181% YoY and 57% YoY respectively.
Market conditions remained tough for the pig iron division with shortage of iron
ore and low end user demand from domestic market which kept pig iron prices
under pressure.
EBITDA remains in red: With iron ore operations remaining shut, EBITDA
continued to be in the negative zone with loss of Rs428mn. Coke and pig iron
operations showed higher production volumes but tough market conditions and
lower pig iron prices resulted in pressure on margins and the company could not
recover the fixed costs of iron ore business completely
Conference call highlights: Goa operations remain closed and restart could
depend on various factors including CEC recommendation and Supreme Court
(SC) hearings on the matter which has not happened till now. Inventory sales of
already mined ore could be allowed by SC and Sesa holds ~3.5 MT of inventory in
Goa. Karnataka operations’ restart has been delayed due to non-receipt of forest
clearance. Liberia expansion has seen capex escalation to US$230mn for phase 1
of 2mtpa and FOB cost guidance has been increased to US$60/t (from ~US$40/t
earlier). Shipments are expected to start by Mar’14 with exit capacity of 2mtpa
achieved by Dec’14. Payment of stamp duty for Goa operations continue and
company paid Rs400mn for the same in Q1. Gross debt stood at ~Rs48bn.
Earnings revised downwards on lower volumes: We revise our iron ore volume
estimates lower for FY14E with low visibility on volumes from Goa post delay in
start of hearing from Supreme Court in Goa. We expect Karnataka operations to
start by Q3FY14E after receiving MoEF forest clearances. We continue to build in
2.29MT volumes from Karnataka operations and expect 1MT inventory sales
volumes from Goa in FY14E. We have revised our EBITDA estimates for FY14E
lower by 66%.
Valuations: We continue to value the stock on the basis of our SOTP valuation for
the proposed group entity Sesa Sterlite (which is expected to be in place soon).
We recommend Buy with a target price of Rs157.
Strong show from power and zinc operations
Sterlite Industries’ (SIIL) EBITDA stood at ~Rs21.7bn, ~7% above our estimates of
Rs20.3bn on account of robust operational performance in merchant power and zinc
operations. EBITDA beat was led by higher MIC production at HZL (238kt, up 27% YoY)
and higher volumes and profitability from SEL (power volumes were higher by ~26%
QoQ and realizations at ~Rs3.5/unit). Copper and aluminium operations remained
subdued on account of shutdowns and VAL delivered better operational performance.
We see volume growth remaining strong in power operations, but remain concerned on
the performance of VAL and BALCO going ahead with further delays in project
commissioning. Additional funding of Rs50bn to VAL by SIIL is negative from minority
shareholders’ perspective in our view. We recommend Buy with a reduced target price of
Rs94, which is based on our SOTP valuation of the proposed merged group entity Sesa
Sterlite.
Volumes increase in power and zinc operations: SIIL saw a sharp increase of ~34%
YoY and ~26% QoQ in power volumes at SEL due to higher PLF of 54% for all 4 units of
600MW combined. MIC production at HZL surprised positively with 27% YoY increase
to 238kt which led to higher integrated volume share for zinc & lead. International zinc
operations witnessed a fall as per guidance and aluminium production at VAL was also
higher than rated capacity. Copper volumes stood at 16kt due to shutdowns as per
TNPCB orders.
Operational profit above expectations: EBITDA was higher than our estimates by
~7% at Rs21.7bn (margin of 26.5%) on account of higher volumes coupled with better
margins at merchant power operations and steady performance by domestic zinc
operations despite realizations and cost pressures. Copper and aluminium operations
witnessed subdued performance and reported negative EBIT on account of forced
shutdowns, lower LME realizations and higher costs.
Conference call highlights: SEL power plant operated at 54 PLF for all 4 units in
Q1FY14 (up from 50% in Q4FY13 for 3 units) and is expected to operate at ~60-70%
PLF in FY14E. BALCO’s power plant commissioning is delayed due to the suspension
of its factory license and delay in other approvals and metal tapping from 325ktpa
smelter is delayed further to Q3FY14E. BALCO coal block mining lease is yet to be
signed along with diversion of forest land and guidance for start of production has
been delayed to FY15E. Zinc international operations are expected to deliver lower
than earlier guidance of 390-400kt volumes in FY14E at CoP of US $1100-1200/t. For
domestic zinc operations, guidance of 15% volume growth in MIC production has
been maintained. Debt levels in standalone books have gone up further on account of
~Rs50bn raised and given as additional loans and advances to VAL along with higher
working capital requirements. Total gross debt at Sterlite-Cons stood at Rs273bn.
Earnings revised marginally: We revise our earnings estimate marginally as we factor
in higher volumes in power but lower volumes in aluminium and copper businesses.
We remain conservative on our LME assumptions on the back of slow global economic
recovery. We revise our USD/INR estimate for FY14E/15E to Rs57/56. We revise our
EBITDA estimate lower for FY14E/15E by 4.7% and 0.2% respectively.
Valuations: We continue to value the stock at 0.6x of the fair value of Sesa Sterlite
(Rs157 assigned by us) based on the announced share swap ratio in the merger. We
recommend Buy with a target price of Rs94.
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