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Zinc – sole positive in 3Q
The key positive in Sterlite’s 3Q results was the QoQ decline in HZL’s cash
costs and the accretion to consol profits from Anglo Zinc. On the negative
side, margins dipped QoQ in copper and aluminium divisions due to higher
costs. We are concerned on the high cost of production and rising losses in
Vedanta Aluminium (VAL) and fear that Sterlite might have to support the
company’s debt servicing obligations in the future. Sterlite Energy’s 3Q trialrun
output, too, disappointed. We upgrade FY11-13 EPS by 2-5% factoring in
higher zinc profits, accretion from Anglo Zinc and higher losses in VAL. O-PF.
3Q results in-line with expectations
Sterlite’s 3Q EBITDA came in 10% above estimates boosted by higher zinc profits
and accretion from the recently acquired ‘Skorpion’ mine of Anglo-Zinc for one
month. The QoQ decline in HZL’s cash costs (first time in six quarters) was a key
positive and boosted zinc EBIT margins by 540 bps QoQ. Commissioning of HZL’s
lead smelter in 4Q and rising silver output are the key positives ahead for HZL.
High costs plague aluminium and copper divisions
Copper and aluminium divisions disappointed with EBIT margins declining 110 bps
and 260 bps QoQ respectively. Cash costs in Balco at ~US$1800/t and in VAL at
US$2050/t are very high and the lack of bauxite is hurting. If VAL’s costs don’t
drop, we see risk of Sterlite having to support VAL’s debt obligations via further
equity infusion. Mgmt expects VAL’s steady state costs to drop to US$1650/t but
we are sceptical. VAL is proceeding with Phase-II smelter expansion and will bring
it to construction complete stage but will not commission it till bauxite is available.
Sterlite Energy’s (SEL) power output disappoints
SEL produced 245m units of power in 3Q under trial production – much below our
expectations. We hope that the balance three units will not face similar issues
while ramping up. On the issue of Coal India’s ability to supply SEL and Balco with
the required quantities of linkage coal, management sounded tentative and didn’t
rule out having to use e-auction coal in case of any shortfall. Our estimates
assume SEL getting 75% of its coal requirements from e-auction/imported coal.
Upgrading EPS estimates 2-5%; maintain O-PF
We believe that Sterlite needs a sustained improvement in operating performance
across divisions – especially aluminium and power - for stock performance to
improve. Successful completion of the remaining Anglo-zinc assets in Ireland and
South Africa by end-FY11 will add 4-8% to our FY12-13 EPS and will be a positive
trigger. The decision of Balco’s arbitration panel against Sterlite will add to
continued concerns on the group’s relations with the government. Valuations,
though, remain reasonable at 8.5x FY12 EPS. Maintain O-PF.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Zinc – sole positive in 3Q
The key positive in Sterlite’s 3Q results was the QoQ decline in HZL’s cash
costs and the accretion to consol profits from Anglo Zinc. On the negative
side, margins dipped QoQ in copper and aluminium divisions due to higher
costs. We are concerned on the high cost of production and rising losses in
Vedanta Aluminium (VAL) and fear that Sterlite might have to support the
company’s debt servicing obligations in the future. Sterlite Energy’s 3Q trialrun
output, too, disappointed. We upgrade FY11-13 EPS by 2-5% factoring in
higher zinc profits, accretion from Anglo Zinc and higher losses in VAL. O-PF.
3Q results in-line with expectations
Sterlite’s 3Q EBITDA came in 10% above estimates boosted by higher zinc profits
and accretion from the recently acquired ‘Skorpion’ mine of Anglo-Zinc for one
month. The QoQ decline in HZL’s cash costs (first time in six quarters) was a key
positive and boosted zinc EBIT margins by 540 bps QoQ. Commissioning of HZL’s
lead smelter in 4Q and rising silver output are the key positives ahead for HZL.
High costs plague aluminium and copper divisions
Copper and aluminium divisions disappointed with EBIT margins declining 110 bps
and 260 bps QoQ respectively. Cash costs in Balco at ~US$1800/t and in VAL at
US$2050/t are very high and the lack of bauxite is hurting. If VAL’s costs don’t
drop, we see risk of Sterlite having to support VAL’s debt obligations via further
equity infusion. Mgmt expects VAL’s steady state costs to drop to US$1650/t but
we are sceptical. VAL is proceeding with Phase-II smelter expansion and will bring
it to construction complete stage but will not commission it till bauxite is available.
Sterlite Energy’s (SEL) power output disappoints
SEL produced 245m units of power in 3Q under trial production – much below our
expectations. We hope that the balance three units will not face similar issues
while ramping up. On the issue of Coal India’s ability to supply SEL and Balco with
the required quantities of linkage coal, management sounded tentative and didn’t
rule out having to use e-auction coal in case of any shortfall. Our estimates
assume SEL getting 75% of its coal requirements from e-auction/imported coal.
Upgrading EPS estimates 2-5%; maintain O-PF
We believe that Sterlite needs a sustained improvement in operating performance
across divisions – especially aluminium and power - for stock performance to
improve. Successful completion of the remaining Anglo-zinc assets in Ireland and
South Africa by end-FY11 will add 4-8% to our FY12-13 EPS and will be a positive
trigger. The decision of Balco’s arbitration panel against Sterlite will add to
continued concerns on the group’s relations with the government. Valuations,
though, remain reasonable at 8.5x FY12 EPS. Maintain O-PF.
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