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Sterlite Industries |
Topline zooms, bottomline falters; Accumulate |
ACCUMULATE
CMP: Rs 179 Target Price: Rs 205
n Sterlite Industry’s Q3FY11 numbers remain mixed with topline, exceeding expectations grew by 24% and 37% respectively on YoY and QoQ basis to Rs 83.3 bn
n EBITDA remained in line with expectations at Rs 19.8 bn growing by 12% and 29% on YoY and QoQ respectively, margin however contracted by 269 bps YoY to 23.9%
n Though, APAT grew by 10% and 7% YoY and QoQ respectively to Rs 11.05 bn, it remained lower than expectations against our and street estimates
n Factoring in higher base metals prices and uncertainties related to different businesses our EPS estimates stand at Rs 13.5 and Rs 20.3 respectively for FY11E and FY12E
Revenue exceeds expectations on higher LME, slime sales
During Q3FY11 prices of all the base metals led by copper rose sharply on LME due to
recovery hopes in the developed markets and launching of ETFs in copper and
aluminium. The average LME price (per tonne) for copper, aluminium, zinc and lead
remained at US$8674 (up 30% YoY and 18% QoQ), US$2343 (up 17% YoY), US$2315
(up 4.7% YoY) and US$2390 (up 4.3% YoY) respectively. Higher sales volume in zinc
and copper also helped topline growth. Another major contribution came from highest
ever anode slime sales to the tune of Rs 9.24 bn (up by 66% YoY and 453% QoQ)
during the quarter contributing 21% to the standalone topline
Margin contracts on higher costs
Despite stronger topline, the company witnessed margin contraction during the quarter
in most of the businesses. In copper business the EBIT margin remained at 2.7%, lower
by 73 bps and 94 bps on YoY and QoQ basis. This can mainly be attributed to the fall in
Tc/ Rc charge to US$11.2 against US$14.7/ tonne in Q3FY10 and US$11.8/ tonne in
Q2FY11. Higher cost of coal and rise in stripping costs in zinc mines also increased zinc
metals costs (without royalty) by 5% YoY to Rs 35500/ tonne (US$792). In the
aluminum business too the company continued to face challenges in controlling cost of
production. In VAL the aluminium production costs remained at US$2050/ tonne, while
in Balco it was recorded at US$1795/ tonne against US$1667/ tonne in Q3FY10. In
power business too higher cost of generation at Rs 1.82/ unit (Rs 1.73/ unit in Q3FY10)
and lower realization at Rs 2.72/ unit (Rs 5.16 in Q3FY10) put further pressure on the
margins. We believe, cost pressure to improve in zinc and copper businesses in near
future, however, remain cautious on aluminium and power businesses.
Outlook and Valuations
At the CMP of RS 179, the stock is trading at 8.8x FY12E EPS and 3.6x FY12E EV/
EBITDA. We value the stock on SOTP method to come at a target price of Rs 205/
share valuing all the metals businesses on EV/ EBITDA basis and power business on
DCF method. We assign ACCUMULATE rating on the stock.
Zinc led the volume growth
Among all the metals, zinc saw significant volume (both production and sales) growth YoY.
On QoQ basis, while copper cathodes aided volume growth on QoQ basis only. Lead saw
fall in both production and sales on YoY as well as QoQ basis due to planned maintenance
shutdown at Ausmelt and Pyro smelters. Silver production sales also saw dip both on YoY
and QoQ basis. Aluminium volume remained flat on the other hand both on YoY and QoQ
basis.
Topline boosted by sharp rise LME prices
During the quarter, LME prices for all the base metals soared significantly led by copper
due to some recovery hopes in the developed markets and launching of some ETFs in
copper and aluminium. Inventory at LME for copper and aluminium also saw some
depletion recently providing support the prices. For zinc and lead however, inventory pile
continued to rise, however, prices mainly followed recovery in copper and aluminium. Silver
prices on the hand rose sharply on strong investment demand following gold.
Key takeaways
Zin/ Lead Business
§ Robust performance at Zinc-lead mines with highest ever production at 222,250 tonnes
§ Silver production flat however like to increase significantly to almost 500 tonnes by exit
of FY 2012 (currently ~ 200 tonnes per annum)
§ Costs under pressure (more than 5% QoQ) on account higher energy costs & stripping
at mines
§ Skorpion Zinc acquisition in December contributes to the EBITDA by Rs 620 mn; two
other zinc assets of Anglo American coming into fold
Copper Business
§ Production fell to 79,000 MT (vs. 85,000 MT in Q3FY10) on account temporary
shutdown following court order
§ Better by product (Sulpheuric acid) realization and better operational efficiency however
helped in reduction in net cost of production for Q3 to USc1.24/ lb against Usc10.37/ lb
in Q3FY10
Aluminium Business
§ Production flat at 65,000 MT
§ Cost of production remained at US$1795 per tonne compared to US$1667 per tonne in
Q3FY10
Energy Business
§ Generation at 454 Mn units (higher by 17% YoY), realization per unit Rs 2.72 per unit
(lower by 47% YoY)
§ First unit of 300 MW out of 1200 MW in Balco is likely to be commissioned in Q4FY11
§ The first unit (600 MW) of 2400 MW (4x600 MW) IPP at Jharsuguda has been
operational, however, its still under stabilization process. The second unit (600 MW) also
has been commissioned during the quarter and is being synchronised
Balco arbitration update
Sterlite’s buyout of residual 49% stake in Balco, which long under arbitration, has been
decided against Sterlite. The decision is likely to be challenged by Sterlite in the High Court.
We can see a similar fate in the case of Sterlite seeking the residual about 29% stake in
HZL. The operational performance of Sterlite is unlikely to change as it continues to hold
majority stake both in Balco & HZL. Major strategic decisions requiring Board approval,
may see scrutiny of government nominees on HZL & Balco’s Board.
Outlook and Valuation
We believe that the zinc business would continue to do well and would remain the key to
Sterlite’s overall performance. Ramp up in power business also is likely to aid business
growth in the coming year. Copper on the other hand remains a concern due to pending
decision on the Tuticorin smelter by the honourable Supreme court and also lower Tc/ Rc
margin despite higher LME. We would also like to remain cautious on the aluminium
business, due to lack of clarity on bauxite sourcing and expansion plans.
At the CMP of RS 179, the stock is trading at 8.8x FY12E EPS and 3.6x FY12E EV/
EBITDA. We value the stock on SOTP method to come at a target price of Rs 205/ share
valuing all the metals businesses on EV/ EBITDA basis and power business on DCF
method. We assign ACCUMULATE rating on the stock.
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