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UBS Investment Research
Sterlite Industries
H industan Zinc Q1 results largely in line
Event: Operating results largely in line, PAT marginally higher
Hindustan Zinc Ltd (HZL) reported Q1FY12 results which are largely in line with
our est – EBITDA of Rs15.6b (-18.8% QoQ, +56% YoY) vs our est of Rs16b
(EBITDA margin was 55.5% vs our est of 55%). However, PAT was higher than
expected at Rs14.9b (-15.6% QoQ, +67.8% YoY) vs our est of Rs14b, due to
higher other income of Rs3.8b vs our est of Rs2.5b. Net sales was Rs28.2b (-
11.8% QoQ, +44.6% YoY) vs our est of Rs29.1b.
Impact: Positive for Sterlite Industries
Sterlite Industries owns 65% in HZL. HZL contributed 70%/63% of Sterlite’s
consolidated PAT for FY10/FY11. Though results are significantly higher on a
YoY basis, the QoQ decline is due to 1) lower refined Zinc/Lead realizations 2)
marginally lower refined metal volumes 3) no/lower Zinc/Lead concentrate sales.
Action: Reiterate Buy on Sterlite, positives outweigh regulatory overhang
We believe Sterlite remains an attractive risk reward play at current levels given
triggers such as: 1)strong earnings momentum from existing operations
(zinc/lead/silver volume growth in FY12 in HZL) 2)consolidation of earnings
from Anglo Zinc 3) strong metal prices and 4)attractive valuations.
Valuation: Buy rating and price target of Rs215.00
We value Sterlite’s key businesses (copper, Zinc/HZL, Balco) on March 2013E
EV/EBITDA of 5.5x (average of the last two cycles) and investments at book
value. HZL contributes Rs120/share to our target price of Sterlite (57% of target
price).
While EBITDA was largely inline with our expectations, PAT came in
higher than expected due to higher other income, which is primarily
investment income. The company had a cash & cash equivalents balance of
cUS$3.5bn as of June 30, 2011. The yield on investments was c10% for the
quarter.
Details from Conference Call
Royalty was down 23% sequentially because of lower concentrate
production, as production at Rampura Agucha mine was shut down for 2
weeks due to technical issues. However, the refined metal production was
not impacted as the concentrate inventory was drawn down. The technical
issue at the mine has been resolved and the management expects to make up
the production loss of 2 weeks in the due course of the year.
Management expects Zinc cost of production for FY12 to be c800-850 $/t.
The effective tax rate for FY12 is also expected to hover around 17-18%
levels seen this quarter.
The 100 ktpa Lead smelter at Dariba has been commissioned; will produce
saleable metal by the mid of Q2FY12. This will also feed the silver refinery
enabling the company to achieve c350 tons (capacity would be 500 tpa) of
Silver in FY12. The management expects the new silver refinery to produce
saleable silver by the end of Q2FY12. At the current silver prices, 500tpa of
silver sales would translate into an EBITDA of cUS$650m. Silver volumes
are expected to go up from c60 t (41 t of Silver metal + c15t of silver
contained in Lead concentrate) in this quarter to c80-90 t over the coming
quarters as the Sindesar Khurd mine ramps up production to 2 mtpa run rate
from the current 1.2 mtpa rate.
The management reiterated that it prefers organic growth to inorganic. At the
current rate of production, the company has a mine life of 30 years which the
management is trying to enhance further by investing in exploration.
In the case of Zawar mine, all the approvals are in place and the matter is
pending with the honourable Supreme Court (related to mining in the forest
area). Mining in the non forest area of the Zawar complex has already started.
The company faced some water constraints last quarter, which have been
resolved as of now
Zinc concentrate sales were nil in the quarter as the company’s flagship mine,
Rampur Agucha was shut down for 2 weeks (as already highlighted above).
Refined Zinc realisation was down 6% QoQ which was in line with the LME
metal price movement.
HZL management’s view on MMDR Bill
As we highlighted in our note “GoM Approves Draft Mining Tax Bill” dated
Jul 11, 2011, HZL/Sterlite would be negatively impacted if the royalty on
Zinc/Lead/Silver is doubled. We estimate that the worst case impact on
Sterlite Industries would be c7% at the EBITDA/PAT level.
HZL management believes the actual implementation of the bill requires
many modalities to be sorted out (for example: policy on distribution of the
tax collected etc) and doesn’t expect the bill to come into effect any soon.
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
H industan Zinc Q1 results largely in line
Event: Operating results largely in line, PAT marginally higher
Hindustan Zinc Ltd (HZL) reported Q1FY12 results which are largely in line with
our est – EBITDA of Rs15.6b (-18.8% QoQ, +56% YoY) vs our est of Rs16b
(EBITDA margin was 55.5% vs our est of 55%). However, PAT was higher than
expected at Rs14.9b (-15.6% QoQ, +67.8% YoY) vs our est of Rs14b, due to
higher other income of Rs3.8b vs our est of Rs2.5b. Net sales was Rs28.2b (-
11.8% QoQ, +44.6% YoY) vs our est of Rs29.1b.
Impact: Positive for Sterlite Industries
Sterlite Industries owns 65% in HZL. HZL contributed 70%/63% of Sterlite’s
consolidated PAT for FY10/FY11. Though results are significantly higher on a
YoY basis, the QoQ decline is due to 1) lower refined Zinc/Lead realizations 2)
marginally lower refined metal volumes 3) no/lower Zinc/Lead concentrate sales.
Action: Reiterate Buy on Sterlite, positives outweigh regulatory overhang
We believe Sterlite remains an attractive risk reward play at current levels given
triggers such as: 1)strong earnings momentum from existing operations
(zinc/lead/silver volume growth in FY12 in HZL) 2)consolidation of earnings
from Anglo Zinc 3) strong metal prices and 4)attractive valuations.
Valuation: Buy rating and price target of Rs215.00
We value Sterlite’s key businesses (copper, Zinc/HZL, Balco) on March 2013E
EV/EBITDA of 5.5x (average of the last two cycles) and investments at book
value. HZL contributes Rs120/share to our target price of Sterlite (57% of target
price).
While EBITDA was largely inline with our expectations, PAT came in
higher than expected due to higher other income, which is primarily
investment income. The company had a cash & cash equivalents balance of
cUS$3.5bn as of June 30, 2011. The yield on investments was c10% for the
quarter.
Details from Conference Call
Royalty was down 23% sequentially because of lower concentrate
production, as production at Rampura Agucha mine was shut down for 2
weeks due to technical issues. However, the refined metal production was
not impacted as the concentrate inventory was drawn down. The technical
issue at the mine has been resolved and the management expects to make up
the production loss of 2 weeks in the due course of the year.
Management expects Zinc cost of production for FY12 to be c800-850 $/t.
The effective tax rate for FY12 is also expected to hover around 17-18%
levels seen this quarter.
The 100 ktpa Lead smelter at Dariba has been commissioned; will produce
saleable metal by the mid of Q2FY12. This will also feed the silver refinery
enabling the company to achieve c350 tons (capacity would be 500 tpa) of
Silver in FY12. The management expects the new silver refinery to produce
saleable silver by the end of Q2FY12. At the current silver prices, 500tpa of
silver sales would translate into an EBITDA of cUS$650m. Silver volumes
are expected to go up from c60 t (41 t of Silver metal + c15t of silver
contained in Lead concentrate) in this quarter to c80-90 t over the coming
quarters as the Sindesar Khurd mine ramps up production to 2 mtpa run rate
from the current 1.2 mtpa rate.
The management reiterated that it prefers organic growth to inorganic. At the
current rate of production, the company has a mine life of 30 years which the
management is trying to enhance further by investing in exploration.
In the case of Zawar mine, all the approvals are in place and the matter is
pending with the honourable Supreme Court (related to mining in the forest
area). Mining in the non forest area of the Zawar complex has already started.
The company faced some water constraints last quarter, which have been
resolved as of now
Zinc concentrate sales were nil in the quarter as the company’s flagship mine,
Rampur Agucha was shut down for 2 weeks (as already highlighted above).
Refined Zinc realisation was down 6% QoQ which was in line with the LME
metal price movement.
HZL management’s view on MMDR Bill
As we highlighted in our note “GoM Approves Draft Mining Tax Bill” dated
Jul 11, 2011, HZL/Sterlite would be negatively impacted if the royalty on
Zinc/Lead/Silver is doubled. We estimate that the worst case impact on
Sterlite Industries would be c7% at the EBITDA/PAT level.
HZL management believes the actual implementation of the bill requires
many modalities to be sorted out (for example: policy on distribution of the
tax collected etc) and doesn’t expect the bill to come into effect any soon.
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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