Monday, October 10, 2011

>STERLITE INDUSTRIES: News flow should improve – valuations at deep discount, reaffirm Buy

Power ramp-up a key catalyst

Action: Overly pessimistic valuation; attractive opportunity
Sterlite Industries has corrected by 40% over the past 12 months (Sensex:-26%), reflecting continuous negative news flow and concerns over a deteriorating macro environment. We believe the current stock price is building in a USD1,600/t zinc price (current: USD1,860/t), assigning no
value to the power and aluminium business, and ignoring loans to group companies. Although its 64.9% stake in Hindustan Zinc (HZ) contributes 50-55% of earnings, Sterlite has underperformed HZ by 28% over the past 12 months.

Catalysts: Improving power business and news flow
Improving utilization of power plants should be a key catalyst along with resilient earnings, we believe. Any news flow on a stake sale by the government in HZ and Balco should also be positive.

Valuation: Target price cut to INR169; reiterate Buy
We value Sterlite Industries on a sum-of-the-parts basis at INR169/share. We have cut our target price to incorporate expected lower zinc prices and higher coal costs. The stock is trading at 5.6x FY13F EPS of INR18.7 and 3.4x FY13F EV/EBITDA. The stock is trading at a FY12F P/B of 0.8x,
despite an ROE close to 14% even on our conservative estimates. We believe these are attractive valuations and reaffirm our Buy rating.

Sterlite Energy (SEL) has shown PLF improving to 60% over the past two months from near 30% in March 2011. Although coal costs have risen, we believe SEL has performed much better than expected. With a third unit of 600MW under commissioning, we expect SEL to see better performance.

To read full report: STERLITE INDUSTRIES