Sterlite Industries - No surprises; upgrade to BUY on attractive valuations.:: Kotak Sec

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Sterlite Industries (STLT)
Metals
No surprises; upgrade to BUY on attractive valuations. Sterlite reported 2QFY11
EBITDA of Rs15.3 bn, 5.2% ahead of our estimate and led by solid performance from
the zinc business. Net income of Rs10.1 bn beat our estimate with the help of forex
gains. Sterlite has progressed well in its lead-silver capacity expansion and power
projects; however, the future of aluminium expansion remains unclear. Upgrade to BUY
from ADD on attractive valuation with a target price of Rs200, which is based on
conservative assumptions and builds in negative Rs20/share for VAL.


2QFY11 performance broadly in line with our estimates
Sterlite’s 2QFY11 EBITDA of Rs15.3 bn (+12% yoy and +2.1%qoq) was 5.2% ahead of our
estimate of Rs14.5 bn. Performance was led by the zinc-lead business with EBITDA of Rs11 bn
(+4.7% yoy, 10.2% qoq) and aluminium segment EBITDA of Rs1.4 bn (+69.4% qoq, 23.1% yoy),
while power EBITDA of Rs0.7 bn (-7.5% yoy, -46.8% qoq) and copper EBITDA of Rs2.1 bn (+3%
yoy, -19.3% qoq) lagged. Net income of Rs 10.1 bn (flat qoq, +5.1% yoy) was helped by forex
gains of Rs715 mn versus a loss of Rs690 mn in 1QFY11 and Rs262 mn in 2QFY10.
New projects to power performance in FY2012E and FY2013E
We forecast EBITDA growth of 57.1% for FY2012E and 16.7% for FY2013E. Growth will be
powered by (1) full benefits of zinc-lead capacity expansion; (2) expansion of silver refinery and (3)
strong contribution from power business. Revenues from the first unit of the 2400 MW (4X600
MW) Jharsugda will start accruing in November 2010; Sterlite expects synchronization of the
second unit by 3QFY11 and the balance units at a 3-month interval each from December 2010.
Synchronization of the first unit of 1200MW (4X300 MW) power plant of Balco will start by end-
FY2011E — the remaining units will come up with a 3-month interval. The management indicated
it may not start metal tapping from new aluminium smelting capacity of VAL and Balco until it
gets a go-ahead for the Lanjigarh alumina refinery expansion and alternative source for bauxite.
The company may instead sell power on a merchant basis from the power plants set up for
producing aluminium.
Deep-value but requires resolution of disputes/ recent alleged violations, Upgrade to BUY
We have broadly retained our estimates on the companies for the next three years. Key changes to
our estimates include (1) increase in zinc-lead and aluminium price assumption; (2) we assume that
Balco will not start aluminium smelter and instead sell power from CPP and (3) revision in Re/US$
rate. Upgrade to BUY from ADD earlier on attractive valuations, with a target price of Rs200 based
on end-FY2012E financials. Our estimates and target price are based on conservative commodity
price assumptions. We do not ascribe any equity value to VAL project, loans extended by Sterlite to
VAL and investments in new 325ktpa aluminum smelter of Balco.