Sterlite Industries - Strong show from power and zinc operations - Centrum

Sterlite Industries' (SIIL) EBITDA stood at ~Rs21.7bn, ~7% above our estimates of Rs20.3bn on account of robust operational performance in merchant power and zinc operations. EBITDA beat was led by higher MIC production at HZL (238kt, up 27% YoY) and higher volumes and profitability from SEL (power volumes were higher by ~26% QoQ and realizations at ~Rs3.5/unit). Copper and aluminium operations remained subdued on account of shutdowns and VAL delivered better operational performance. We see volume growth remaining strong in power operations, but remain concerned on the performance of VAL and BALCO going ahead with further delays in project commissioning. Additional funding of Rs50bn to VAL by SIIL is negative from minority shareholders' perspective in our view. We recommend Buy with a reduced target price of Rs94, which is based on our SOTP valuation of the proposed merged group entity Sesa Sterlite.

Volumes increase in power and zinc operations: SIIL saw a sharp increase of ~34% YoY and ~26% QoQ in power volumes at SEL due to higher PLF of 54% for all 4 units of 600MW combined. MIC production at HZL surprised positively with 27% YoY increase to 238kt which led to higher integrated volume share for zinc & lead. International zinc operations witnessed a fall as per guidance and aluminium production at VAL was also higher than rated capacity. Copper volumes stood at 16kt due to shutdowns as per TNPCB orders.

Operational profit above expectations: EBITDA was higher than our estimates by ~7% at Rs21.7bn (margin of 26.5%) on account of higher volumes coupled with better margins at merchant power operations and steady performance by domestic zinc operations despite realizations and cost pressures. Copper and aluminium operations witnessed subdued performance and reported negative EBIT on account of forced shutdowns, lower LME realizations and higher costs.

Conference call highlights: SEL power plant operated at 54 PLF for all 4 units in Q1FY14 (up from 50% in Q4FY13 for 3 units) and is expected to operate at ~60-70% PLF in FY14E. BALCO's power plant commissioning is delayed due to the suspension of its factory license and delay in other approvals and metal tapping from 325ktpa smelter is delayed further to Q3FY14E. BALCO coal block mining lease is yet to be signed along with diversion of forest land and guidance for start of production has been delayed to FY15E. Zinc international operations are expected to deliver lower than earlier guidance of 390-400kt volumes in FY14E at CoP of US $1100-1200/t. For domestic zinc operations, guidance of 15% volume growth in MIC production has been maintained. Debt levels in standalone books have gone up further on account of ~Rs50bn raised and given as additional loans and advances to VAL along with higher working capital requirements. Total gross debt at Sterlite-Cons stood at Rs273bn.

Earnings revised marginally: We revise our earnings estimate marginally as we factor in higher volumes in power but lower volumes in aluminium and copper businesses. We remain conservative on our LME assumptions on the back of slow global economic recovery. We revise our USD/INR estimate for FY14E/15E to Rs57/56. We revise our EBITDA estimate lower for FY14E/15E by 4.7% and 0.2% respectively.

Valuations: We continue to value the stock at 0.6x of the fair value of Sesa Sterlite (Rs157 assigned by us) based on the announced share swap ratio in the merger. We recommend Buy with a target price of Rs94.

Source : Equity Bulls

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