Sterlite Industries - Silver prices and higher volumes aid earnings beat ::JPMorgan

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Sterlite Industries Overweight
STRL.BO, STLT IN
Silver prices and higher volumes aid earnings beat


 Zinc segment delivers impressive performance in tough quarter: STLT’s
zinc subsidiary, Hindustan Zinc (HZ, NR) reported EBITDA of Rs 15.9bn v/s
JPMe of Rs14.9bn and Bloomberg consensus estimates of Rs15.3bn. Given the
q/q decline in LME zinc (down 6% q/q) and higher coal costs, these are
impressive results and in our view, provide another data point confirming
STLT's earnings growth story being driven by volumes and not only the
commodity price variable. PAT beat was more significant with reported PAT of
Rs14.9bn v/s JPMe of Rs13.2bn driven by higher other income.
 Strong silver prices, concentrate sales, refined zinc sales help earnings:
Similar to Q4, earnings were helped by higher silver sales. While refined silver
production increased only 8% y/y to ~47K, concentrate sales of silver rich lead
concentrate (~17K) combined with higher silver prices (+110% y/y, +21% q/q)
aided earnings. Refined zinc sales increased as the company drew down on
inventory (royalty paid inventory and hence modest timing benefit on costs).
 Refined production ahead of estimates, Mined metal impacted by one off
issues at Rampura Agucha: Refined zinc production at 193KT (+17% y/y) was
significantly ahead of estimates of 175KT, as the 210KT Dariba smelter
operated at full capacity. Mined metal production was weak with total mined
metal production at 188KT up only 4% y/y (down 18% q/q). The company
attributed this to unplanned shutdown at the key Rampura Agucha mine, which
the company expects to make up over the course of the year. While we remain
confident in our full year estimate of 780KT of refined zinc, Rampura
Agucha remains the key asset. On the conference call the company highlighted
that mine production is back to normalized levels and expects to make up the
loss production over the next 2 quarters.
 Zinc CoP (excluding royalty) increases sharply to $874/MT, +$100/MT q/q,
+$230/MT y/y: Cost inflation returned with refined zinc CoP increase, driven
by higher energy costs, and the volume loss at Agucha mine. Going forward,
while the unplanned shutdown impact should lessen, given the coal price surge,
a material decline in zinc CoP looks unlikely. On the conference call the
company indicated that most of the higher priced coal has flowed through the
P&L.
 Silver production to continue to pick up, in sync with SK mine ramp up:
Company guided to full year silver production of 300-350T v/s our estimates of
300T. SK mine stood at 1.2MT compared to 1MT annualized capacity as of
Mar-11 and company expects to ramp this to exit capacity of 2MT by end-FY12.
 Broadly these are strong numbers, and we expect STLT to beat our
consolidated EBITDA and PAT estimates of Rs24.3bn and Rs13.3bn given
the beat at the domestic zinc subsidiary. With silver production continuing to
increase, we expect zinc and silver earnings for STLT to remain strong. STLT
reports consolidated 1QFY12 results on 25-Jul-11 (Monday).