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UBS Investment Research
Sterlite Industries
Q 1 results ahead of estimates
Event: Q1 FY12 results better UBS and consensus estimates
Net income at Rs16.4bn (+63% YoY, -15% QoQ) was higher than UBS and
consensus estimates of Rs15.4bn/15.6bn. EBITDA was Rs27.2bn (+87% YoY,
-9% QoQ) vs. UBS and consensus of Rs25.8bn/26.6bn. However, EBITDA margin
was 27.7% vs. our estimate of 28.4% on higher raw material and fuel costs.
Revenue at Rs98.2bn (+66% YoY, -2% QoQ) was 8%/4% higher then UBS and
consensus due to a rise in power revenues from Rs6.1bn (+138% YoY,+176%
QoQ) and higher production of zinc.
Impact: Zinc drives earnings; VAL a drag; copper/Balco stable
Zinc (HZL + the acquired Anglo Zinc assets) contributed 77% to consolidated
EBITDA of Rs27bn while HZL alone contributed 59% of PAT. Copper EBITDA
increased 27% QoQ despite lower volume due to higher by-product realisations.
Vedanta Aluminium (VAL) continues to be a high-cost operation on high coal and
alumina costs, with a negative contribution of Rs1.06bn to consolidated PAT.
Action: Reiterate Buy on Sterlite; positives outweigh regulatory overhang
We believe Sterlite remains an attractive risk-reward play at current levels based
on: 1) strong earnings momentum at existing operations (zinc/lead/silver volume
growth at HZL in FY12 and the Anglo Zinc assets; 2) a stable copper business and
Balco; 3) strong metal prices; and 4) attractive valuations.
Valuation: price target of Rs215.00
We value Sterlite’s key businesses (copper, zinc/HZL, Balco) based on FY13E
EV/EBITDA of 5.5x (the average of the past two cycles) and investments at book
value. HZL contributes Rs120/share to our price target.
The zinc business continues to drive operating earnings at 77% of Sterlite’s
consolidated EBITDA. The international zinc assets (Anglo Zinc acquisition)
production was ahead of expectations (the first quarter of full consolidation).
At 119,000t (including MIC), the first full quarter of production post
acquisition was strong, generating EBITDA of Rs5.17bn (c20% of
consolidated EBITDA).
A stable copper business contributed 12% of consolidated EBITDA. Copper
segment EBITDA was up 27% YoY despite a 4% decrease in volume
primarily because of a lower net cost of production (higher by-product
credits).
Balco contributed c7% of Sterlite’s consolidated EBITDA and operated at
close to rated capacity in the quarter with production of 61,000t (-1.6% QoQ,
-3% YoY). However, higher alumina and coal costs increased cost of
production by US$200t/US$168/t on a QoQ/YoY basis.
At Rs8.7bn, other income was the other major contributor to the bottom line.
However, adjusting for non-recurring items, other income was Rs7.5bn.
Update on expansion projects
The expansion of wind power generation capacity to 273MW is progressing
and scheduled for completion by Q2 FY12.
The construction of the captive power plant at Tuticorin is ongoing and the
first unit is scheduled for commissioning in Q4 FY12.
The 400ktpa copper smelter expansion project at Tuticorin is awaiting
approval from the State Pollution Control Board.
Work on the Balco 1,200MW (4 x 300MW) captive thermal power plant
project at Korba is progressing as planned, and management expects the first
unit to commence power generation by Q2 FY12.
Work on the 325kt aluminium smelter project at Korba is ongoing, and
management targets the first metal tapping in Q4 FY12.
Work on the remaining two 600MW units at the 2,400MW Jharsuguda
power plant is progressing, and the units should be synchronised in Q3/Q4
FY12, respectively.
The first unit of the 2,640MW power project at Talwandi Sabo should be
synchronised by Q4 FY13, but may be delayed given issues with coal supply.
Sterlite standalone
Recoveries at the copper business were good. The business remains stable
albeit with a low margin.
Net cost of production declined from 0.99c/lb in Q4 FY11 to -2.9c/lb due to
higher by-product credits and improved metal recovery.
EBITDA increased 27% YoY primarily because of higher by-product credits.
Tc/Rc was marginally higher.
The National Environment Research Institute (NEERI) inspected the
Tuticorin smelter as directed by the Supreme Court and has submitted a
report. The next hearing is scheduled for 10 August 2011.
Hindustan Zinc
Hindustan Zinc’s (HZL) Q1 FY12 results were largely in line with our
estimates—EBITDA of Rs15.6bn (-18.8% QoQ, +56% YoY) vs. our
estimate of Rs16bn (EBITDA margin was 55.5% vs. our 55%). However,
PAT was higher than expected at Rs14.9bn (-15.6% QoQ, +67.8% YoY) vs.
our Rs14bn, due to higher other income of Rs3.8b vs. our Rs2.5bn. Net sales
were Rs28.2bn (-11.8% QoQ, +44.6% YoY) vs. our Rs29.1bn.
Management expects cost of production for FY12 at US$800-850/t
(excluding royalties). The effective tax rate for FY12 should be 17-18%,
around the same as this quarter.
Sterlite Industries owns 65% of HZL. HZL contributed 70%/63% of
Sterlite’s consolidated PAT for FY10/FY11. Although the results were
significantly higher on a YoY basis, the QoQ decline was due to: 1) lower
refined zinc/lead realizations; 2) marginally lower refined metal volumes;
and 3) no/lower zinc/lead concentrate sales.
The 100ktpa lead smelter at Dariba has been commissioned and will produce
saleable metal by mid-Q2 FY12. It will also feed the silver refinery, enabling
the company to produce 350 tonnes (capacity would be 500tpa) of silver in
FY12. Management expects the new silver refinery to produce saleable silver
by the end of Q2 FY12. At current silver prices, 500tpa of sales would
translate to an EBITDA of cUS$650m. Silver volumes should rise from c60t
(41t of silver metal + c15t of silver contained in lead concentrate) this quarter
to 80-90t in upcoming quarters, as the Sindesar Khurd mine ramps up
production to a 2mtpa run rate from the current 1.2mtpa rate.
Sterlite Industries
Sterlite Industries, the flagship of the Agarwal group, owns a 400ktpa copper
smelter in Tuticorin, India. It is the holding company for Hindustan Zinc (HZL,
with a 65% stake), Balco (51%), Copper Mines of Tasmania (CMT, 100%), and
Sterlite Power (100%) within the Vedanta group. HZL had 411ktps zinc
smelting capacity at end-FY07, which the company expects to raise to 669ktpa
by June 2008. Balco has increased its aluminium smelting capacity from
135ktpa to 345ktpa. Sterlite is setting up a 2,400 MW merchant power plant that
should start operations by December 2009. Sterlite holds 30% of Vedanta
Alumina.
Statement of Risk
We believe a sharp fall in zinc prices, which are linked to global economic
growth, would be the key risk factor for Sterlite. The company may not, for
whatever reason, be able to acquire the government stake in HZL and/or
BALCO, which could affect the consolidation of operations into the future.
Disruptions in power supply could lead to delays in projects and/or increases in
capex requirements.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sterlite Industries
Q 1 results ahead of estimates
Event: Q1 FY12 results better UBS and consensus estimates
Net income at Rs16.4bn (+63% YoY, -15% QoQ) was higher than UBS and
consensus estimates of Rs15.4bn/15.6bn. EBITDA was Rs27.2bn (+87% YoY,
-9% QoQ) vs. UBS and consensus of Rs25.8bn/26.6bn. However, EBITDA margin
was 27.7% vs. our estimate of 28.4% on higher raw material and fuel costs.
Revenue at Rs98.2bn (+66% YoY, -2% QoQ) was 8%/4% higher then UBS and
consensus due to a rise in power revenues from Rs6.1bn (+138% YoY,+176%
QoQ) and higher production of zinc.
Impact: Zinc drives earnings; VAL a drag; copper/Balco stable
Zinc (HZL + the acquired Anglo Zinc assets) contributed 77% to consolidated
EBITDA of Rs27bn while HZL alone contributed 59% of PAT. Copper EBITDA
increased 27% QoQ despite lower volume due to higher by-product realisations.
Vedanta Aluminium (VAL) continues to be a high-cost operation on high coal and
alumina costs, with a negative contribution of Rs1.06bn to consolidated PAT.
Action: Reiterate Buy on Sterlite; positives outweigh regulatory overhang
We believe Sterlite remains an attractive risk-reward play at current levels based
on: 1) strong earnings momentum at existing operations (zinc/lead/silver volume
growth at HZL in FY12 and the Anglo Zinc assets; 2) a stable copper business and
Balco; 3) strong metal prices; and 4) attractive valuations.
Valuation: price target of Rs215.00
We value Sterlite’s key businesses (copper, zinc/HZL, Balco) based on FY13E
EV/EBITDA of 5.5x (the average of the past two cycles) and investments at book
value. HZL contributes Rs120/share to our price target.
The zinc business continues to drive operating earnings at 77% of Sterlite’s
consolidated EBITDA. The international zinc assets (Anglo Zinc acquisition)
production was ahead of expectations (the first quarter of full consolidation).
At 119,000t (including MIC), the first full quarter of production post
acquisition was strong, generating EBITDA of Rs5.17bn (c20% of
consolidated EBITDA).
A stable copper business contributed 12% of consolidated EBITDA. Copper
segment EBITDA was up 27% YoY despite a 4% decrease in volume
primarily because of a lower net cost of production (higher by-product
credits).
Balco contributed c7% of Sterlite’s consolidated EBITDA and operated at
close to rated capacity in the quarter with production of 61,000t (-1.6% QoQ,
-3% YoY). However, higher alumina and coal costs increased cost of
production by US$200t/US$168/t on a QoQ/YoY basis.
At Rs8.7bn, other income was the other major contributor to the bottom line.
However, adjusting for non-recurring items, other income was Rs7.5bn.
Update on expansion projects
The expansion of wind power generation capacity to 273MW is progressing
and scheduled for completion by Q2 FY12.
The construction of the captive power plant at Tuticorin is ongoing and the
first unit is scheduled for commissioning in Q4 FY12.
The 400ktpa copper smelter expansion project at Tuticorin is awaiting
approval from the State Pollution Control Board.
Work on the Balco 1,200MW (4 x 300MW) captive thermal power plant
project at Korba is progressing as planned, and management expects the first
unit to commence power generation by Q2 FY12.
Work on the 325kt aluminium smelter project at Korba is ongoing, and
management targets the first metal tapping in Q4 FY12.
Work on the remaining two 600MW units at the 2,400MW Jharsuguda
power plant is progressing, and the units should be synchronised in Q3/Q4
FY12, respectively.
The first unit of the 2,640MW power project at Talwandi Sabo should be
synchronised by Q4 FY13, but may be delayed given issues with coal supply.
Sterlite standalone
Recoveries at the copper business were good. The business remains stable
albeit with a low margin.
Net cost of production declined from 0.99c/lb in Q4 FY11 to -2.9c/lb due to
higher by-product credits and improved metal recovery.
EBITDA increased 27% YoY primarily because of higher by-product credits.
Tc/Rc was marginally higher.
The National Environment Research Institute (NEERI) inspected the
Tuticorin smelter as directed by the Supreme Court and has submitted a
report. The next hearing is scheduled for 10 August 2011.
Hindustan Zinc
Hindustan Zinc’s (HZL) Q1 FY12 results were largely in line with our
estimates—EBITDA of Rs15.6bn (-18.8% QoQ, +56% YoY) vs. our
estimate of Rs16bn (EBITDA margin was 55.5% vs. our 55%). However,
PAT was higher than expected at Rs14.9bn (-15.6% QoQ, +67.8% YoY) vs.
our Rs14bn, due to higher other income of Rs3.8b vs. our Rs2.5bn. Net sales
were Rs28.2bn (-11.8% QoQ, +44.6% YoY) vs. our Rs29.1bn.
Management expects cost of production for FY12 at US$800-850/t
(excluding royalties). The effective tax rate for FY12 should be 17-18%,
around the same as this quarter.
Sterlite Industries owns 65% of HZL. HZL contributed 70%/63% of
Sterlite’s consolidated PAT for FY10/FY11. Although the results were
significantly higher on a YoY basis, the QoQ decline was due to: 1) lower
refined zinc/lead realizations; 2) marginally lower refined metal volumes;
and 3) no/lower zinc/lead concentrate sales.
The 100ktpa lead smelter at Dariba has been commissioned and will produce
saleable metal by mid-Q2 FY12. It will also feed the silver refinery, enabling
the company to produce 350 tonnes (capacity would be 500tpa) of silver in
FY12. Management expects the new silver refinery to produce saleable silver
by the end of Q2 FY12. At current silver prices, 500tpa of sales would
translate to an EBITDA of cUS$650m. Silver volumes should rise from c60t
(41t of silver metal + c15t of silver contained in lead concentrate) this quarter
to 80-90t in upcoming quarters, as the Sindesar Khurd mine ramps up
production to a 2mtpa run rate from the current 1.2mtpa rate.
Sterlite Industries
Sterlite Industries, the flagship of the Agarwal group, owns a 400ktpa copper
smelter in Tuticorin, India. It is the holding company for Hindustan Zinc (HZL,
with a 65% stake), Balco (51%), Copper Mines of Tasmania (CMT, 100%), and
Sterlite Power (100%) within the Vedanta group. HZL had 411ktps zinc
smelting capacity at end-FY07, which the company expects to raise to 669ktpa
by June 2008. Balco has increased its aluminium smelting capacity from
135ktpa to 345ktpa. Sterlite is setting up a 2,400 MW merchant power plant that
should start operations by December 2009. Sterlite holds 30% of Vedanta
Alumina.
Statement of Risk
We believe a sharp fall in zinc prices, which are linked to global economic
growth, would be the key risk factor for Sterlite. The company may not, for
whatever reason, be able to acquire the government stake in HZL and/or
BALCO, which could affect the consolidation of operations into the future.
Disruptions in power supply could lead to delays in projects and/or increases in
capex requirements.
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