>STERLITE INDUSTRIES: Project issues continue

■ Q2FY11 production numbers in line
Vedanta Group’s/Sterlite Industries’ (Sterlite) Q2FY11 declared production
numbers were largely in line with our estimates. Lead production, however, was
7% ahead of our expectations.

■ Copper, VAL, and BALCO expansions effectively on hold
The 100 ktpa lead capacity expansion has been delayed by a quarter and is now
expected to be completed in Q3FY11. The 400 ktpa brown field copper expansion
has been put on hold considering the high court order to shut the existing
smelter due to environmental/pollution issues and pending approval from the
State Pollution Control Board. The Supreme Court has currently issued a stay on
the above order and hearing on the matter is scheduled on October 18.
With the Ministry of Environment and Forests withholding clearance for Vedanta
Aluminium’s (VAL) bauxite mine and objecting to the alumina expansion, the
company has effectively put on hold the entire expansion—alumina expansion at
VAL to 5 mt from the current 1 mt, smelter expansions of 1.25 mtpa at
Jharsuguda and 325 kt at Korba—at VAL and BALCO.

■ Increased power available for merchant sales
The company had planned to source power from Sterlite Energy’s (SEL) 2,400
MW plant for its upcoming 1.25 mtpa aluminium smelter at Jharsuguda. With
that project being deferred, the power available now will be sold on merchant
basis. Similarly, the entire output from the 1,200 MW captive power plant at
BALCO (for 325 ktpa smelter III) will also be available for merchant sales.

■ Outlook and valuations: Project execution concerns; maintain ‘BUY’
We are revising down Sterlite’s FY11E and FY12E PAT 8% and 4%, respectively,
after factoring in lower volume growth in Hindustan Zinc (HZL) and project
delays in copper, VAL, SEL and BALCO. Cash costs at VAL are running higher
than expected at ~USD 1,900/t even after considering purchased bauxite. While
the various projects and environment related issues will be an overhang on the
stock, we believe this has been factored in the stock price. From a longer-term
perspective we see value in the business. We retain our ‘BUY/Sector
Performer’ recommendation/rating, but lower our fair valuation to INR 203
(earlier INR 214) considering the revision in estimates.

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