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STERLITE INDUSTRIES (INDIA)
Results in line; cost pressure ahead
Q3FY11 PAT slightly above estimates
Sterlite Industries India (Sterlite) reported consolidated net revenue of INR 83
bn (up 24% Y-o-Y and 37% Q-o-Q) and net profit of INR 11 bn (up 51% Y-o-Y
and 9% Q-o-Q) in Q3FY11. EBITDA, at INR 19.7 bn, was above our estimate of
INR 18.1 bn. Current consolidated cash on books is INR 208 bn.
Strong sequential improvement in business
Zinc business EBITDA increased 35% Q-o-Q, largely due to increased prices and
zinc-lead concentrate sales. BALCO’s EBITDA increased 12% Q-o-Q due to
increased premiums and prices. Q-o-Q, copper business EBITDA rose 8% due to
17% increase in copper production. Copper TcRc were flat Q-o-Q, at ~11 c/lb.
Skorpion Zinc acquisition completed
The company completed the acquisition of Skorpion Zinc (Skorpion), Namibia, in
December 2010. Skorpion produced 13 kt of refined zinc, generated EBITDA of
INR 620 mn and had depreciation of INR 200 mn for December 2010.
First unit of 2,400 MW currently facing coal sourcing challenges
245 MU from first 600 MW was sold as trial production during the quarter. We
expect it to commence commercial production in Q4FY11. However, the unit
would run largely on bought-out coal for Q4FY11 since linkage coal availability is
limited currently, thereby increasing cost.
CPP project expansions on track
The 160 MW (80x2) CPP at Tuticorin is likely to be completed by H1FY12. Also,
the first unit (300 MW) of 1,200 MW CPP at BALCO is expected to be begin
operations by end of Q2FY12. The company has received coal linkage for first
two units and is developing a coal block which is expected to commence
production by Q2FY11. Sales from both plants will be on merchant basis.
Outlook and valuations: Value ahead; maintain ‘BUY’
We are cutting our FY11 EBITDA by 4%, mainly to account for higher costs (for
aluminium, zinc and energy businesses due to coal, bauxite and alumina costs),
revised HZL estimates (lower lead volumes) and reduced power tariff. We retain
our FY12 estimates and ‘BUY/Sector Performer’ recommendation/rating with
fair valuation of INR 205/share. We introduce FY13 estimates.
Copper: 7% Y-o-Y decline in production
Production was down 7% Y-o-Y due to temporary shutdown, following a high court order
in September 2010. TcRc realisation came at 11.2 c/lb during the quarter against 14.7
c/lb in Q3FY10 and 11.75 c/lb in Q2FY11. Y-o-Y increase in profitability is attributable to
improved sulphuric acid prices, which were INR 3,330/t in Q3FY11 against INR 520/t in
Q3FY10. Net cost for quarter was lower at 1.2 US c/lb against US c/lb 10.4 in Q3FY10,
on account of improved sulphuric acid realisation and better operational efficiency.
Aluminium: BALCO cash costs increase USD 50/t Q-o-Q
Aluminium cash cost at BALCO was USD 1,795/t in Q3FY11 against USD 1,667/t in
Q3FY10. The increase is due to higher alumina costs and increase in coal prices. Cash
cost in Q2FY11 was USD 1,748/t.
Smelter and alumina production at Vedanta Aluminium (VAL) is 103 kt and 147 kt,
respectively, for the quarter. The refinery continues to operate with bauxite sourced from
BALCO (50%) and third parties. Aluminium and alumina cash costs at VAL were USD
2,050/t and USD 320/t, respectively, up due to high coal, bauxite and bought-out
alumina costs.
Power: 600 MW second unit successfully synchronised
The external sale of power from BALCO’s captive power plant amounted to 454 mn units.
Revenue and EBITDA from the power segment were INR 1.2 bn and INR 370 mn,
respectively. Power tariff during the quarter was disappointing at INR 2.7/unit (down
from INR 5.2/unit in Q3FY10 and INR 3.5/unit in Q2FY11).
The first unit of the 2,400 MW (4x600 MW) SEL power project is operational and is in the
process of stabilisation. The second unit was synchronised in December 2010. 245 MU
was sold as trial production during the quarter. Commercial operations for the first unit
are expected in Q4FY11.
Work on the 2,640 MW (4x660MW) supercritical power project at Talwandi Sabo is
progressing as scheduled. Around 90% of piling work has been completed and
foundation work for the boiler is in progress.
Zinc: EBITDA up 35% Q-o-Q
EBITDA was INR 15 bn (up 9% Y-o-Y and 35 %Q-o-Q). 20% and 5% Y-o-Y increase in
zinc volumes and prices respectively and zinc-lead concentrate sales partly offset ~14%
Y-o-Y increase in costs (higher coke and coal costs, commodity prices and stripping cost
at mines). The company’s reported zinc cash cost was USD 989/t (including royalty) for
the quarter against USD 907/t in Q3FY10.
Company Description
Sterlite is a subsidiary of Vedanta Resources, the London-listed metals and mining
group. It is the largest non-ferrous metals player in India with presence across key base
metals, viz. aluminium (770,000 tpa, including VAL’s capacity), copper (405,000 tpa),
and zinc lead (964,000 tpa). The company entered the nonferrous metals sector as a
pure play copper producer and through several strategic acquisitions acquired aluminium
as well as zinc-lead assets. Sterlite is the second largest copper smelter in the country.
It has a dominant presence in zinc and aluminium through its majority stakes in HZL and
BALCO. Through its 100% subsidiary, Sterlite Energy, Sterlite has ventured into
commercial power generation business in India. Sterlite proposes to set up a total of
10,000-11,000 MW of coal-based merchant power plant capacity of which 3,380 MW is
already under implementation. The company holds 29.5% minority interest in Vedanta
Aluminium, a 70.5%-owned subsidiary of parent corporation, Vedanta Resources.
Investment Theme
Sterlite has globally competitive unit production costs in zinc, led by its quality captive
mines and power. This aspect will help the company better withstand margin pressures
during price downturns. Recently has completed expansion in HZL & VAL to help volume
growth. Key triggers for the stock will be the acquisition of GoI’s residual stakes in
BALCO and HZL. In addition, the company is aggressively entering the merchant power
industry with a initial capacity of 3,380 MW. This will de-risk Sterlite’s business model,
reducing its dependence on the more cyclical core metals business.
Key Risks
• Global recovery slower or lower than anticipated.
• Delay in the commissioning of merchant power plants and lower than expected
average tariffs.
• Further investment into VAL.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
STERLITE INDUSTRIES (INDIA)
Results in line; cost pressure ahead
Q3FY11 PAT slightly above estimates
Sterlite Industries India (Sterlite) reported consolidated net revenue of INR 83
bn (up 24% Y-o-Y and 37% Q-o-Q) and net profit of INR 11 bn (up 51% Y-o-Y
and 9% Q-o-Q) in Q3FY11. EBITDA, at INR 19.7 bn, was above our estimate of
INR 18.1 bn. Current consolidated cash on books is INR 208 bn.
Strong sequential improvement in business
Zinc business EBITDA increased 35% Q-o-Q, largely due to increased prices and
zinc-lead concentrate sales. BALCO’s EBITDA increased 12% Q-o-Q due to
increased premiums and prices. Q-o-Q, copper business EBITDA rose 8% due to
17% increase in copper production. Copper TcRc were flat Q-o-Q, at ~11 c/lb.
Skorpion Zinc acquisition completed
The company completed the acquisition of Skorpion Zinc (Skorpion), Namibia, in
December 2010. Skorpion produced 13 kt of refined zinc, generated EBITDA of
INR 620 mn and had depreciation of INR 200 mn for December 2010.
First unit of 2,400 MW currently facing coal sourcing challenges
245 MU from first 600 MW was sold as trial production during the quarter. We
expect it to commence commercial production in Q4FY11. However, the unit
would run largely on bought-out coal for Q4FY11 since linkage coal availability is
limited currently, thereby increasing cost.
CPP project expansions on track
The 160 MW (80x2) CPP at Tuticorin is likely to be completed by H1FY12. Also,
the first unit (300 MW) of 1,200 MW CPP at BALCO is expected to be begin
operations by end of Q2FY12. The company has received coal linkage for first
two units and is developing a coal block which is expected to commence
production by Q2FY11. Sales from both plants will be on merchant basis.
Outlook and valuations: Value ahead; maintain ‘BUY’
We are cutting our FY11 EBITDA by 4%, mainly to account for higher costs (for
aluminium, zinc and energy businesses due to coal, bauxite and alumina costs),
revised HZL estimates (lower lead volumes) and reduced power tariff. We retain
our FY12 estimates and ‘BUY/Sector Performer’ recommendation/rating with
fair valuation of INR 205/share. We introduce FY13 estimates.
Copper: 7% Y-o-Y decline in production
Production was down 7% Y-o-Y due to temporary shutdown, following a high court order
in September 2010. TcRc realisation came at 11.2 c/lb during the quarter against 14.7
c/lb in Q3FY10 and 11.75 c/lb in Q2FY11. Y-o-Y increase in profitability is attributable to
improved sulphuric acid prices, which were INR 3,330/t in Q3FY11 against INR 520/t in
Q3FY10. Net cost for quarter was lower at 1.2 US c/lb against US c/lb 10.4 in Q3FY10,
on account of improved sulphuric acid realisation and better operational efficiency.
Aluminium: BALCO cash costs increase USD 50/t Q-o-Q
Aluminium cash cost at BALCO was USD 1,795/t in Q3FY11 against USD 1,667/t in
Q3FY10. The increase is due to higher alumina costs and increase in coal prices. Cash
cost in Q2FY11 was USD 1,748/t.
Smelter and alumina production at Vedanta Aluminium (VAL) is 103 kt and 147 kt,
respectively, for the quarter. The refinery continues to operate with bauxite sourced from
BALCO (50%) and third parties. Aluminium and alumina cash costs at VAL were USD
2,050/t and USD 320/t, respectively, up due to high coal, bauxite and bought-out
alumina costs.
Power: 600 MW second unit successfully synchronised
The external sale of power from BALCO’s captive power plant amounted to 454 mn units.
Revenue and EBITDA from the power segment were INR 1.2 bn and INR 370 mn,
respectively. Power tariff during the quarter was disappointing at INR 2.7/unit (down
from INR 5.2/unit in Q3FY10 and INR 3.5/unit in Q2FY11).
The first unit of the 2,400 MW (4x600 MW) SEL power project is operational and is in the
process of stabilisation. The second unit was synchronised in December 2010. 245 MU
was sold as trial production during the quarter. Commercial operations for the first unit
are expected in Q4FY11.
Work on the 2,640 MW (4x660MW) supercritical power project at Talwandi Sabo is
progressing as scheduled. Around 90% of piling work has been completed and
foundation work for the boiler is in progress.
Zinc: EBITDA up 35% Q-o-Q
EBITDA was INR 15 bn (up 9% Y-o-Y and 35 %Q-o-Q). 20% and 5% Y-o-Y increase in
zinc volumes and prices respectively and zinc-lead concentrate sales partly offset ~14%
Y-o-Y increase in costs (higher coke and coal costs, commodity prices and stripping cost
at mines). The company’s reported zinc cash cost was USD 989/t (including royalty) for
the quarter against USD 907/t in Q3FY10.
Company Description
Sterlite is a subsidiary of Vedanta Resources, the London-listed metals and mining
group. It is the largest non-ferrous metals player in India with presence across key base
metals, viz. aluminium (770,000 tpa, including VAL’s capacity), copper (405,000 tpa),
and zinc lead (964,000 tpa). The company entered the nonferrous metals sector as a
pure play copper producer and through several strategic acquisitions acquired aluminium
as well as zinc-lead assets. Sterlite is the second largest copper smelter in the country.
It has a dominant presence in zinc and aluminium through its majority stakes in HZL and
BALCO. Through its 100% subsidiary, Sterlite Energy, Sterlite has ventured into
commercial power generation business in India. Sterlite proposes to set up a total of
10,000-11,000 MW of coal-based merchant power plant capacity of which 3,380 MW is
already under implementation. The company holds 29.5% minority interest in Vedanta
Aluminium, a 70.5%-owned subsidiary of parent corporation, Vedanta Resources.
Investment Theme
Sterlite has globally competitive unit production costs in zinc, led by its quality captive
mines and power. This aspect will help the company better withstand margin pressures
during price downturns. Recently has completed expansion in HZL & VAL to help volume
growth. Key triggers for the stock will be the acquisition of GoI’s residual stakes in
BALCO and HZL. In addition, the company is aggressively entering the merchant power
industry with a initial capacity of 3,380 MW. This will de-risk Sterlite’s business model,
reducing its dependence on the more cyclical core metals business.
Key Risks
• Global recovery slower or lower than anticipated.
• Delay in the commissioning of merchant power plants and lower than expected
average tariffs.
• Further investment into VAL.
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