>STERLITE INDUSTRIES (KOTAK SECURITIES)

Raise target price but downgrade on valuations.
We have rolled over our target price to FY2011E and revised our target price to Rs540 (Rs490 earlier). Also, we have downgraded our rating on the stock to REDUCE from ADD. Stronger Rupee assumptions have led us to lower our estimates for FY2010 and FY2011 to Rs33.2 and Rs41.8, respectively, from Rs41 and Rs50.5 earlier. We have raised our average copper price assumptions to US$5,000/ton from US$3,600/ton.

Downgrade to REDUCE on valuations
We have rolled over our target price to FY2011E from an average of FY2010 and FY2011 earlier. Following the rollover, we raise our target price from Rs490 to Rs540 which is 6% lower than the CMP. We therefore downgrade the stock from ADD to REDUCE.

Lower earnings by 19% for FY2010 and 17% for FY2011
We have lowered our earnings estimates lower by 19% for FY2010 and by 17% for FY2011 following changes in our Re/US$ assumptions. We have lowered our FY2010 and FY2011 Re/US$ assumptions from Rs50.75 and Rs50.5 to Rs48 and Rs47.75 for FY2010 and FY2011, respectively. Since most of Sterlite’s commodity prices are denominated in US$, earnings are highly sensitive to exchange rates.

Raise average copper price assumptions—no impact on earnings
We have raised our copper price forecast for FY2010 and FY2011 from US$3,600/ton to
US$5,000/ton. However, since the largest part of Sterlite’s copper business comprises of smelting, the impact of copper price revision is only on the topline. We maintain our aluminium price forecasts for FY2010 and FY2011 at US$1,700/ton and US$1,900/ton respectively. Also, our zinc price forecast for FY2010 and FY2011 at US$1,400/ton and US$1,500/ton, respectively, remains unchanged.

Raise power business valuations
We value Sterlite Energy’s 2,400 MW power plant currently under construction at Rs66/share (2X P/B). Sterlite Energy is implementing the project in Orissa and will supply 25% power (600 MW) to the state grid and likely earn regulated returns. Vedanta Aluminium will consume another 1,200 MW and the sale of balance 600 MW still to be tied up. We assume Sterlite Energy will be able to realize regulated returns from the power sale to Vedanta Aluminium, while the likely sale of 600 MW in the merchant market will yield attractive returns.

The project is expected to start commissioning in phases between December 2009 and September 2010. However, we note Sterlite Energy still needs to arrange the complete fuel required for the project. Sterlite Energy has been allocated a coal linkage for 600 MW by Coal India and allocation for the balance is awaited. Production from the allocated coal clock (Rampia and Dip Side of Rampia) will take another 2-3 years to commence. Sterlite Energy’s share of coal from the block is sufficient to fuel 1,000 MW of capacity.

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