Sterlite industries - Earnings below expectation; maintain Reduce - Prabhudas Lilladher

Sterlite Industries (STLT) reported earnings below ours and consensus expectation on account of higher-than-expected interest cost and lower other income. However, the company performed better than our expectation on EBITDA on the back of better show in all the operations, except zinc. We maintain 'Reduce' rating on the stock.

- Copper, Aluminium and Energy led the surprise on EBITDA: STLT reported 17% QoQ growth in EBITDA at Rs26.5bn, ahead of our expectation of Rs25.9bn. The surprise was primarily driven by higher earnings in copper (Rs4.04bn v/s PLe: Rs3.5bn), power (Rs2.4bn v/s PLe: Rs1.8bn) and aluminium (Rs950m v/s PLe: Rs600m) biz, partially offset by lower earnings in Hind zinc (Rs16.2bn v/s PLe: Rs16.5bn) and International zinc ops (Rs3.7bn v/s PLe: Rs4bn).

- PAT short of expectation; courtesy higher interest cost and lower other income: Sharper-than-expected increase in interest cost (Rs3.3bn V/s PLe: Rs1.9bn), up 83% QoQ and surprise fall in other income (Rs7.6b v/s PLe: Rs8.7b), down 19% QoQ, dragged down the adjusted PAT well below our expectation at Rs13.4bn (PLe: Rs14.2bn) despite better-than-expected performance on EBITDA.

- Key Con‐call highlights: 1) Management expects SEL's 2400MW to operate at 65-70% PLF in FY13 2) 10-12% decline in mined metal production at International Zinc biz in FY13 3) Capex guidance at ~US$1.5-1.7bn in FY13 4) Transmission facility of 1000MW evacuation capacity at SEL to become operational in the next two months.

- Valuation and outlook: Weak earnings profile, unattractive returns profile (~12% in FY13/FY14) and higher gearing remains the key argument behind our Reduce rating on the stock. Even, the proposed Sesa-Sterlite restructuring fails to address the key issue related to bauxite sourcing in VAL and lumpiness in SEL's earnings owing to non-signing of long-term PPAs.

Source : Equity Bulls

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