Sterlite Industries HOLD- In keeping with expectations:: ICICI Sec

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Sterlite Industries HOLD
Maintained
In keeping with expectations 
Reason for report: Q2FY11 results review



Sterlite Industries (SIL) reported an in-line Q2FY11 – topline was flat YoY at
Rs60.8bn, whereas EBITDA increased 5% YoY to Rs15.3bn (I-Sec: 16bn). Volume
and margin performance was in step across most of the divisions. However, the
extent of forex fluctuation on raw materials (barring copper), a trend observed
since Q1FY11, is unwarranted. Production volumes were broadly in line, with the
exception of Copper, where volumes were down on account of a biannual
shutdown. Management has guided for moderation of costs in Zinc division in
H2FY11 on the back of easing of operational irregularities. Expansions of BALCO,
Vedanta Aluminium (VAL), and in Copper division have been deferred. Sterlite
Energy’s first unit of 600MW has been commissioned, with the next unit
scheduled to be synchronised in Jan ’11. The funding pattern of VAL continues to
be a drag, as SIL still has an investment (debt + equity) of ~Rs62bn in VAL.
Maintain HOLD with a target price of Rs191/share.
􀁦 Zinc business to show moderation in cost in H2FY11. Due to water scarcity in
Q2FY11, SIL’s Zinc operations had to buy power from outside despite being selfsufficient
in power, resulting in higher-than-expected power costs at ~Rs13,700/te.
Also, Rampura Agucha, their main mine has started showing a recovery of 92%
after a brief lean patch. Further, stripping ratio of Rampura Agucha is guided to
move back to 6-7x after moving up to 15x in the interim. These along with increase
in volumes will result in a reduction of cash cost of US$100/te from Q2FY11 levels
(EBITDA cost reported for Zinc operations at US$1275/te). The management has
guided for the closure of the Anglo-American acquisition by Q3FY11.
􀁦 BALCO expansion deferred. Aluminium (combined with power) revenues and
profitability were broadly in line, with loss in power margins sequentially being made
up by increase in Aluminium margins. BALCO’s Aluminium premiums continue to be
highly volatile, increasing 43% QoQ after falling 90% QoQ in Q1FY11. Reported
cost/te in BALCO declined 2% QoQ, as Q1FY11 witnessed provision for gratuity of
Rs400mn. Our derived metal sales volume from BALCO has increased 3% QoQ to
70.6kte. The 1,200MW power plant in BALCO is in line for commissioning in FY11,
whereas the capex for 325ktpa smelter has been deferred. The 1,200MW power
plant will sell 35% of the power in the spot market.
􀁦 Metal tapping of 1.25mnte smelter in VAL deferred (as expected). The smelter
envisages a total capex of US$2.9bn (US$1.8bn already spent). Also, VAL will have
to defer the expansion of Lanjigarh refinery from 2mnte to 5mnte with an envisaged
capex of US$1.5bn (spent capex of US$800mn). Overall, VAL till date has incurred
capex of Rs267bn funded by Rs135bn of external loan (comprising mostly of shortterm
facility and buyers credit) and the rest by loan/equity from SIL and Vedanta Plc.
SIL’s total funding still stands at Rs62bn. Management continues to guide for a longterm
cost of US$1500-1600/te from current operating cost of US$1850/te.