Tuesday, November 3, 2009


Results above expectations; net revenues at INR 61.3 bn
Sterlite Industries (Sterlite) reported consolidated net revenues of INR 61.3 bn (down 10% Y-o-Y, up 34% Q-o-Q) and net profit of INR 9.6 bn (down 25% Y-o-Y, up 43% Q-o-Q) in Q2FY10, which were above our and consensus estimates. EBITDA was at INR 13.6 bn (down 26% Y-o-Y, up 34% Q-o-Q). Margins, however, were flat at 22.3% Q-o-Q as costs too increased Q-o-Q.

Zinc and copper business perform well; aluminium disappoints
Zinc business performed well with improved zinc premiums and concentrate sales. Margins improved from 51% to 60% sequentially as costs were stable and prices rose Q-o-Q. Copper business was sequentially better even though TcRc margins were constant due to improved byproduct revenues.


Zinc, aluminium projects on schedule; power project slightly delayed
The zinc-lead expansion project (to 1.0 mtpa) is progressing well and may be completed two-three months in advance. VAL and BALCO’s projects are also going as per schedule. The 2,400 MW power project’s initial commissioning date has been delayed by a quarter so as to start from Q4FY10. The company revived the 1,980 MW Talwandi Sabo power project which was deferred during the financial crisis. Captive bauxite mining from Niyamgiri mines has been delayed to H2FY11 against expectation of December 2009. Additionally, copper smelter expansion project of 400 ktpa at Tuticorin will be completed in mid CY11.

Outlook and valuations: Scaling further; maintain ‘BUY’
Q2FY10 has brought out the significance of having a diversified metals portfolio viz. zinc, aluminium, and copper. While Sterlite’s aluminium business disappointed in terms of higher-than-expected costs, zinc and copper business performed, thereby mitigating the issue. The company’s growth projects in zinc, aluminium, and power are expected to lead to earnings growth of 77% in FY11E over FY10 and continue further into FY12 as they ramp up further. We incorporate in our estimates the delay of a quarter in the commercial energy project, the higher-than-expected cost at BALCO due to residual costs at BALCO-I smelter, and lower realisations for surplus power in BALCO. We are revising down our FY10E and FY11E earnings by 13% and 14%, respectively. We retain our ‘BUY/SO’ recommendation. Our fair valuation is INR 849/share.

To read the full report: STERLITE INDUSTRIES