Sterlite Industries– Management meet note:: RBS

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Sterlite Industries (STLT IN, Rs161.95, Buy) – Management meet note

We recently met the management of Sterlite Industries and maintain our positive view on thecompany. We see several triggers for the stock such as i) acquisition of minority government
stakes in BALCO and HZL ii) ramp-up of silver output at HZL from 150t to 500t iii) Sale of
3,870MW of power in merchant markets.


Acquisition of minority stakes
􀂃 The arbitration over the minority government stake in BALCO (49%) and HZL (29.5%) is
over and the judgment is expected anytime. A favorable outcome of arbitration would
see substantial value unlocking, in our view and could potentially free up US$2.4bn of
cash for the group. We believe Sterlite’s valuation could rise by US$1.5bn if it completes
acquisition of government minority stakes.

Ramp-up of silver output
􀂃 Hindustan Zinc produced 87t of silver in 1HFY11 and the company guided for 170t for
the full year during the 2QFY11 conference call. The company is targeting 400 plus
tonnes by FY12 and 600 tonnes by FY13. The expansion in silver output will be driven
by the Sindesar Khurd mine, highly rich in silver. This business will be a significant
growth contributor going forward. Since it is still evolving, our current SOTP valuation
considers silver to be part of the Zinc business.

Power sales to surge
􀂃 Merchant power sales at Sterlite would rise manifold to 3,870MW following the deferral
of aluminum expansions at Vedanta Aluminium operations at Jharsuguda, Orissa and
BALCO’s operations at Korba, Chhatisgarh. Before the deferral of the aluminium
expansions at these locations, power sales were expected at 1200MW, which
comprised of 600MW of power from BALCO and 600MW of power from Sterlite Energy
(SEL). With the change in plans, an additional 2400MW of power (1800MW additional
from SEL and 600MW from BALCO) would be available for sale in merchant markets.
This would lead to a sharp jump in power sold from 154MW in FY10 to an estimated
449MW in FY11 and 2200MW in FY12. We estimate that by FY13, the energy segment
will contribute 10% of net revenues and 20% of EBITDA.

􀂃 SEL IPO: Sterlite is also looking at value unlocking at SEL through an IPO, which may
be launched once market conditions are appropriate.