>STERLITE INDUSTRIES: Best zinc play

■ Bullish on Sterlite’s exposure to zinc
Sterlite has augmented its zinc capacity though organic and inorganic routes. Dariba smelter added 210ktpa, Anglo’s assets would add c.400ktpa taking the total zinc-lead capacity to 1,462ktpa; in all c.11% of the world’s total zinc-lead capacity. We are bullish due to two emerging themes for the zinc market - China’s robust concentrate imports, coupled with struggling global mine supply.

■ Downward revision to our short term metal estimates
The UBS global commodity team has decreased its 2010 estimates for zinc from 105c/lb to 93c/lb (-12%) and aluminium from 103c/lb to 94c/lb (-9%). This is due to aggressive sell-downs in inventory on concerns over policy tightening in China, slower loan growth and industrial activity and the ‘post-stimulus’ slowdown. We incorporate lower metal prices into our estimates.

■ Expect to catch up underperformance to metals index
We have revised our earnings estimates by -9.2%/ -7.3% for FY11/12 following the revision to our metal price estimates. Sterlite has underperformed the BSE Metals index by c.8% YTD; we believe it should catch up on the underperformance with the bullish outlook on zinc

■ Valuation: Reiterate Buy; lower price target to Rs225
We reiterate our Buy rating with a lower price target of Rs225. We base our price target on a sum-of-the-parts valuation of individual businesses. The value of businesses is derived from an NPV valuation method using explicit mine life forecasts. We assume a WACC of 13.2% for the copper and zinc business and 12.1% for BALCO.

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