Sterlite Industries - Q4FY12 Result update/Estimate change/Rating change - Centrum

Operational improvement across assets

Sterlite industries (HZL) Q4FY12 results were better than our expectations with net sales of Rs107.6bn, up by 5% QoQ, against our expectation of Rs100.2bn on account of higher volumes in lead and silver division. EBITDA stood at ~Rs27bn with margin at 25.1% (against our expectation of 24.9%), 230bps higher QoQ as new capacities in lead and silver stabilised and power production cost at SEL reduced to ~Rs2.3/unit. Operational improvements were visible across assets and we believe volume growth from zinc operations at HZL and power operations at HZL and BALCO would remain the key earnings driver going ahead. We recommend buy with a target price of Rs125, which is based on our SOTP valuation of the proposed merged group entity Sesa Sterlite.

Volumes grow in power, lead and silver: Lead and silver sales went up sequentially by ~30% and ~56% respectively as both the lead smelter and silver refinery stabilisations were faster than our expectations. Power volumes at SEL also went up by ~7% sequentially as first 2 units stabilised and delivered PLF of ~65%. Copper volumes and aluminium production at BALCO remained stable.

Margin shows sequential improvement: EBITDA improved by ~16% QoQ to ~Rs27bn and EBITDA margin stood at 25.1%, up by 230 bps QoQ as operational costs were rationalized in HZL on account of stabilization of new capacities in lead and silver and power production cost at SEL reduced to Rs2.3/unit.

Conference call highlights: Indian zinc operations to see stable mined metal production in FY13E with increase in silver integrated production to 350 ktpa. International zinc operations mine life has been increased due to exploration but falling grades would lead to 10-12% lower production in FY13E. SEL's 3 units of 600 MW have started commercial production with 65% PLF in first two units. 4th unit is under trial run and would be commercialized in Q1FY13E. BALCO's first power unit of 300 MW is expect to get synchronized in Q1FY13E and VAL's cost of production in aluminium has stabilized below US$2000/tonne due to improved operating performance. Copper operations remain stable and TCRC are expected to remain at ~14c/lb.

Earnings revised downwards for FY14E on expected royalty increase: We revise our earnings estimate for FY14E as we factor in ~50% increase (against proposed 100% increase in mining bill) in royalty on, zinc, lead and silver from FY14E. We revise our zinc volume estimates lower for FY13E/14E in both Indian and international operations. Aluminium volumes are revised lower at BALCO due to delay in commissioning of new smelter. We remain conservative on our realizations assumptions.

Valuations: We continue to value the stock on the basis of our SOTP valuation for the proposed group entity Sesa Sterlite (which is expected to be in place before CY12E end). Sterlite fair value stands at 0.6x of the fair value of Sesa Sterlite based on the announced share swap ratio in the merger. We recommend buy with a target price of Rs125.

Source : Equity Bulls

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