Sterlite Industries - Volume growth to pick up pace going ahead - Centrum

Sterlite Industries' (SIIL) EBITDA stood at ~Rs25.3bn, above our estimates of Rs24.2bn on account of higher volume performance in aluminium and silver divisions. Margin stood at 22.9%, lower than our expectations 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 subdued LME) operations. Positive surprise was delivered on i) stable power volumes from SEL despite evacuation issues due to better coal procurement ii) stable volumes and CoP at VAL aluminium operations and iii) higher volumes at BALCO combined with much higher premiums for physical metal. We see volume growth picking up pace from SIIL's diversified portfolio of base metal and power assets and expect much better H2FY13 performance with higher zinc mining output. We recommend buy with a target price of Rs115, which is based on our SOTP valuation of the proposed merged group entity Sesa Sterlite.

- Volumes grow in aluminium, power, lead and silver: SIIL saw YoY volume growth of ~5% in aluminium, 77% in lead and ~98% in silver. Power volumes at SEL remained strong and went up by ~53% YoY as coal availability improved but evacuation issues after grid failure restricted volumes. Zinc volumes at HZL and International zinc operations witnessed fall as per guidance and aluminium production at VAL was higher than rated capacity.

- Margin shows sequential improvement: EBITDA increased by ~5% YoY to ~Rs25.3bn (margin of 22.9%, up by 110 bps QoQ) on account of higher volumes and earnings at India zinc operations, higher volumes and premiums in aluminium at BALCO and lower cost at International zinc operations. Stable QoQ volumes at SEL power plant also had a positive EBITDA impact.

- Conference call highlights: SEL power plant operated under 50% PLF in H1 though coal sourcing issues were less of a concern than evacuation issues post grid failure. BALCO's first power unit of 300 MW has not been synchronized due to the delay in approvals and metal tapping from 325ktpa smelter is delayed to Q4FY13E. VAL's cost of production in aluminium has stabilized below US$2000/tonne due to improved operating performance and higher output at the smelter. Copper operations have witnessed lower Tc/Rc and higher costs due to low by-product realizations. International zinc operations have seen better cost performance 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 output from the new smelter and refinery. Mining expansions from the new and existing mines would deliver growth in domestic zinc, lead & silver operations in coming years.

- Earnings revised upwards: We revise our earnings estimate upwards as we factor in lower costs in zinc, power and aluminium businesses going forward. We maintain our LME assumptions for base metals largely on a conservative side and revise our USD/INR estimate for FY13E/14E to Rs53/50. We revise our EBITDA and PAT estimate upwards for FY14E by 0.5% and 4.9% respectively.

- Valuations: We continue to value the stock at 0.6x of the fair value of Sesa Sterlite (Rs192 assigned by us) based on the announced share swap ratio in the merger. We recommend Buy with a target price of Rs115.

Source : Equity Bulls

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