>Sterlite Industries (ICICI Securities)

* Though long-term strategy in place… ASARCO’s operations are fully integrated with current production of 237,000tpa, which includes 37,000te tolling and mine production of 200,000tpa (cash cost for refining at US$1.4/lb). The current mine life is 25 years, which SIL expects to increase to 40 years through further exploration. Given SIL’s proven track record of cost optimisation, the management expects to reduce costs further by US¢10-15/lb in ASARCO. We believe the acquisition is driven by long-term management philosophy of acquiring distressed assets and turning them around irrespective of short-term financial pressure.

* …short-term concerns persist. The acquisition is marginally earnings-dilutive in the short term. With US$1.1bn of upfront cash payment being financed from SIL’s books, we expect SIL’s consolidated and standalone earnings to decrease 9% and 5% respectively in FY10E provided the deal goes through. We estimate the acquisition to generate 12.7% IRR vis-à-vis 16% as guided by the management.

* Valuations. Given long-term EBITDA estimate of US$188mn for ASARCO, the EV/EBITDA of ~9x at US$1,700mn looks expensive considering the current global EV/EBITDA average of 5-6x (of Teck Cominco and Xstrata). We estimate SIL’s new sum-of-the-parts (SOTP) fair value to be Rs306/share (vis-à-vis earlier price target of Rs317/share) with 25% upside from the current levels provided the deal goes through. Reiterate BUY.

To see full report: STERLITE