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Volume, margin boost for Sterlite

Ujjval Jauhari / Mumbai 31 Jul 12 | 12:02 AM

Sterlite Industries has seen its stock decline 38 per cent on the bourses in a year’s time, but things are expected to change for the better. Concerns over global metal demand leading to metal prices crashing have been responsible for underperformance of most metal stocks. The impact of lower metal prices was also visible on realisations and profitability of Sterlite in the June 2012 quarter as rupee depreciation led to forex losses adding to its woes.

While the global uncertainties make it difficult to predict the short-term outlook for metals, the ongoing expansions across verticals indicate that Sterlite stands to gain from rising volumes in the medium term. Also, margins in some of the businesses are expected to improve, and prospects of Sterlite’s power segment also look promising.

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In the near-term, the swap ratio for Sesa-Sterlite merger (three shares of Sesa-Goa for five of Sterlite) indicates there is upside for the stock. Notably, the combined entity will provide a diverse play of ferrous and non-ferrous metals with crude oil also being part of the business. Simply put, in the long-run, gains in some businesses should provide cushion when other businesses face tough times. Most analysts, thus, are positive and value the company (at combined entity valuations) at between Rs 115-138 per share, which indicates 10-33 per cent upside from current level of Rs 104.

Copper disappoints
Copper, the largest segment contributing about 48 per cent to revenues, saw higher cost of production and lower treatment and refining charges (Tc/Rc). Thus, even as copper volumes increased 19 per cent year-on-year (y-o-y)to 88,305 tonnes, its profitability was affected; Ebitda (at Rs 265 crore) thus, was 19.9 per cent lower y-o-y and 34 per cent sequentially. Positively, Tc/Rc, which is a key profitability indicator, is expected to improve to around 15 US cents/lb from 12.5 cent in June quarter during the second half of CY12 as unviable global capacities close.

In Rs crore Q1’ FY13 FY13E FY14E
Net sales 10,648 43,287 47,460
% change y-o-y 8.0 5.1 9.6
Ebitda 2,308 11,631 13,270
Ebitda (%) 21.7 26.9 28.0
Net profit 1,202 5,437 6,520
% change y-o-y -26.7 12.6 19.9
EPS (Rs) 3.6 16.2 19.4
PE (x) 28.9 6.4 5.4
E: Estimates                            Source: Nirmal Bang Institutional Equities

Zinc volumes decline
Zinc and lead segment, the second largest segment for Sterlite, contributed 34 per cent to revenues. The increased smelter capacities saw lead and silver volumes surge 96 per cent and 84 per cent y-o-y to 29,000 tonnes and 73,000 kg, respectively in June quarter. However, even as Hindustan Zinc (Sterlite’s subsidiary) increased its mining capacity in FY12, the June quarter saw lower zinc volumes (1,61,000 tonnes; 17 per cent lower y-o-y and 15 per cent sequentially) due to lower-grade ore production at one of its mines. This along with increased cost of production impacted zinc-lead segment profitability (Ebitda declined 13 per cent y-o-y and 18 per cent sequentially). The pressure was partly offset by Silver, which saw increasing revenues and profits.

Power surprises, but overall profits down
Aluminium, a smaller segment (about seven per cent of revenue) saw volumes decline three per cent, both y-o-y and sequentially. Higher costs of alumina with low grade of bauxite (raw material) impacted its profitability, say analysts.

Positively, the power segment (about seven per cent of revenues) surprised as generation surged by 49 per cent to 2,458 million on better coal availability. Notably, realisations also increased two per cent y-o-y while cost per unit dropped 6.5 per cent, estimate analysts, thereby helping the segment’s Ebitda margin expand to 38 per cent compared to 27 per cent in the June 2011 quarter (32 per cent in the March quarter).

Put together, with major segments witnessing pressure on profitability, Sterlite’s Ebitda margin declined to 21.7 per cent compared to 25 per cent in March 2012 quarter and 28 per cent in the year-ago period. Forex loss of Rs 390 crore further impacted profits.

Expansions in progress
While three of the four units (600Mw each) of Sterlite Energy’s 2,400 Mw power plant (Jharsuguda, Orissa) are already functioning, the fourth unit is likely to be synchronised in the September 2012 quarter. For this power plant, 35 per cent coal is being sourced through linkages and 50-55 per cent will be sourced through e-auctions (rest through imports). Sterlite Energy’s 1,980 Mw Talwandi Saboo power plant, too, is progressing well and its first unit of 660Mw is expected to be synchronised by the last quarter of FY13.

Balco, a part of the aluminium business, is likely to start metal tapping operations at its 3,25,000-tonne smelter by December 2012 quarter. Its first of four units (of 300 Mw each) of its 1,200 Mw power plant is likely to get synchronised in the current quarter. While Balco’s 211-MT coal block has got environmental clearance, forest clearances are to be obtained, which Nirmal Bang analysts believe will get delayed.

While Sterlite Energy (wholly owned by Sterlite Industries) is showing strong and improving performance, all eyes are on larger the copper and zinc-lead segment. Analysts at ICICI Securities say Sterlite’s management is negotiating Tc/Rc of 15 US cents for FY13. If achieved, it will boost profitability. Zinc volumes and profitability are also likely to improve in the second half of FY13 with ore grades improving. Though Zinc may end the year at a flatter note, lead and silver will help drive revenues and profitability.

In aluminium, Balco may see higher grade bauxite production leading to some improvement in profitability while Vedanta Aluminium is likely to see flat performance, according to analysts. Net-net, even as overall revenue growth is projected in single-digit, profit growth should be better between 12-16 per cent led by improving margins.

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