Saturday, May 2, 2009

>Sterlite Industries (IDFC SSKI)


■ Sterlite Q4FY09 net profit adjusted for impairment write-back, change in accounting policies for depreciation and
forex losses at Rs5.2bn was broadly in-line with estimates (Rs5.1bn). Operating performance in Copper business was marginally ahead of estimates even as Balco’s profitability surprised on the lower side.

■ Production cut in Balco-I resulted in spot sale of surplus power (130MW annualized). On the back of drop in alumina prices, focus on operational efficiencies and shut-down of in-efficient capacities Balco’s cost of production dropped 16%qoq to an average of US$1,385/tonne for the quarter—production cost in March’09 dropped further to US$1,177/tonne. Interestingly, management did not rule away possibility of moth balling a part of Balco-I facility in case of lower base metal prices specifically considering that sale of power from captive plant yielding better returns.

■ Copper business reported operating profit of Rs2.9bn marginally ahead of our estimates on the back of lower than
expected drop in by-product credits. Hindustan Zinc numbers (reported earlier) were largely inline with our estimates.

■ Adjusting for change in accounting policy, asset write-down and capitalization of new assets depreciation for the
quarter was surprisingly higher. Similarly, adjusted for write-back of earlier year provisions, the tax rate for the quarter was at 20.3%--significantly higher on qoq basis as the profit contribution from Hindustan Zinc increased considerably.

■ Sterlite’s share of loss from Vedanta Aluminium (VAL) was apparently significantly higher at Rs1bn—however, the company clarified that a large part of this was on account of mark-to-market forex losses in the company. Adjusting for this, the share of loss from VAL was inline with estimates.

■ Arbitration process for Balco stake acquisition on; conclusion unlikely soon: After the Indian government
disputed Balco’s balance stake sale; Sterlite had earlier sought legal relief and had requested the court to appoint an independent arbitrator to resolve the issue. Management indicated arbitration proceeds on Balco call option are currently in progress; with Hindustan Zinc likely to follow. We believe the arbitration process in unlikely to be settled soon.

ASARCO Acquisition: The US bankruptcy court recently approved Sterlite’s bid to acquire operating assets of ASARCO at a NPV of ~US$1.3bn (US$1.1bn of upfront payment and US$600m of staggered payment over nine years). Sterlite is now also entitled to receive break up fee and reimbursement of expenses, in event of competing bid. Management however, clarified that the old agreement (with a bid value of US$2.1bn) would be released only once
the deal is completed with new terms. Further, in case of a competing bid, Sterlite would not be under an obligation to match the higher bid—though it retains a right of first refusal, according to the management.

Expansion plans: We remain convinced that expansion plans across all business lines (metals & power) are
progressing on or ahead of schedule. Exhibit 2 below highlights key progress achieved so far and expected timeline for the projects.

To see full report: STERLITE INDUSTRIES