Sterlite Industries - Q1FY13 Result Update - Centrum

Volume growth starting to play out

Sterlite Industries (SIIL) EBITDA stood at ~Rs23.1bn, in line with our estimates of Rs23.2bn but margin was lower at 21.8% (down 330bps QoQ) on account of lower margins in domestic zinc (lower mining output), copper (lower TC/RC and by-product realizations) and aluminium (higher CoP at BALCO and lower LME) operations. Positive surprise was delivered on i) higher power volumes from SEL at lower CoP due to better coal procurement and ii) stable volumes and CoP at VAL aluminium operations. We see volume growth starting to play out from SIIL's diversified portfolio of base metal and power assets. 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 copper, power, lead and silver: SIIL saw robust YoY volume growth of ~19% in copper, 97% in lead and ~78% in silver. Power volumes at SEL surprised positively and went up by ~16% sequentially and ~73% YoY as 3 units of 600 MW each stabilised and delivered PLF of ~65% on account of improved availability of domestic coal. Zinc volumes at HZL and International zinc operations witnessed fall as per guidance and aluminium production at BALCO remained largely stable.

- Margin shows drop: EBITDA dropped by ~16% YoY to ~Rs23.1bn on account of lower volumes and earnings at India zinc operations, lower custom margins at copper business, higher aluminium production cost at BALCO and lower volumes at International zinc operations. Positive surprise was lower cost of production and higher volumes at SEL power plant on account of improving coal supply from Coal India.

- Conference call highlights - Coal sourcing improving: SEL power plant is expected to receive coal from CIL on linkage as well as inventory evacuation basis apart from eauction route. SEL's 3 units of 600 MW have stabilized with ~65% PLF and 4th unit is under trial run and would be commercialized in Q2FY13E. BALCO's first power unit of 300 MW is expect to get synchronized in Q2FY13E 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 ~14-15c/lb but by product realizations are seen lower. International Zinc operations would see 10% lower volumes in FY13E and Indian zinc operations would deliver flat zinc volumes in FY13E with pick up in H2FY13E. Lead and silver operations remain on track to provide smart volume growth in both FY13E & FY14E on the back of higher mining volumes from SK mine and higher metal outputs from new smelter and refinery.

- Earnings revised upwards: We revise our earnings estimate upwards as we factor in higher power volumes from SEL and largely maintain our volume estimates in other divisions. We revise our LME assumptions lower for aluminium and copper and raise our USD/INR estimate for FY13E/14E to Rs52/50. We revise our EBITDA and PAT estimate upwards for FY14E by 5.2% and 10.9% respectively.

- 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 (Rs208 assigned by us) based on the announced share swap ratio in the merger. We recommend Buy with a target price of Rs125.

Source : Equity Bulls

Keywords