Sterlite Industries - Operational improvement; Hold - Anand Rathi

Sterlite Industries' (Sterlite) 2QFY13 consolidated EBITDA, at Rs.25.3bn, was better than estimates, led by above estimated volumes across business segments. PAT, at Rs.17.4bn, was significantly higher than expectations due to forex gains and lower finance expenses. Sterlite will benefit from ramp-up of merchant power capacity and improvement in copper business due to commissioning of CPP. We, however, retain Hold as the rerating is constrained by access to cheaper raw materials and visibility on the projects.

Above expected EBITDA across segments. Zinc India, silver, copper, power and zinc international delivered volumes better than expected, boosting EBITDA to Rs.25.3bn. Copper segment had currency gains of ~Rs.450mn on operational hedges, further aiding EBITDA margins.

Unit cash costs broadly in line. Aluminium premiums increased US$130/tn sequentially as witnessed in the industry, which helped curtail losses in the aluminium segment. Interest was lower 26.5% QoQ due to absence of forex loss present in interest cost in Q1FY13 and forex gain of Rs.2.2bn. PAT was boosted by EBITDA beat and higher other income to Rs.17.5bn with growth of 75%YoY.

Aluminium, power benefit from easing coal issues. Sterlite has guided that coal sourcing for power business (Sterlite Energy) is sufficient to increase PLF from present 50% to 75% in the medium term. Coal costs are also set to decline in the coming quarters which will benefit BALCO and VAL but bauxite sourcing for VAL remains a challenge capping contribution to profitability.

Valuations. Sterlite is valued as proportionate share of the merged entity Sesa Sterlite on SOTP basis and we retain Hold. Risks. Earlier than expected access to raw material and stronger realisations.

Source : Equity Bulls

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