Friday, January 29, 2010


The metal czar…
Sterlite Industries (SIIL) is India’s largest non-ferrous metals and mining company with its primary business spread across copper, aluminium, zinc & lead and power. With its world class mining and smelting assets ensuring low cost of operations across all base metals (especially zinc), strong organic growth pipeline through massive expansion and robust balance sheet with cash/share of ~Rs 300 (December 2009), SIIL is set to reap the benefits of the current commodity up cycle. We expect SIIL to register an FY09-12E CAGR of 23.2% and 32% in net sales and net profit, respectively, and initiate coverage on the stock with a BUY rating.

Unprecedented organic growth story unfolding
SIIL combines an impressive mix of world class assets across base metals, diversification benefits through merchant power foray, excellent project execution and value addition skills and visibility of volume growth in the years ahead. An unprecedented organic growth story is unfolding at SIIL with capacity expansion ranging from 40- 175% across base metal products slated to be on stream by FY12E.

Zinc operations – The real cash cow
SIIL’s zinc operations have emerged as the real cash cow with lowest decile cost structure on a global level and integrated model amid extremely robust zinc and lead prices. We expect zinc operations to contribute ~45% to SIIL’s consolidated FY12E bottomline.

Aluminium operations – Diversified yet powerful growth
Diversification through selling of captive power and smelter expansions in Balco and VAL backed by low cost integrated structure would result in power packed growth in aluminium operations.

Valuations – Positive surprises and upside remain
At the current market price of Rs 768, the stock is trading at 7.9x FY12E EPS of Rs 96.8. With positive surprises (minority buyouts & captive bauxite feed kick-off) expected in due course, we expect an upward re-rating of the stock, going forward. We value the stock using sum of the parts methodology. We are assigning a target price of Rs 918 to the stock and initiating coverage on SIIL with a BUY rating.

To read the full report: STERLITE INDUSTRIES