Sterlite Industries reported subdued performance for the quarter ended March 2012, impacted by higher interest cost, lower margins and exceptional items. Notably, the pressure on its performance is likely to stay for some more time. The absence of volume growth, increasing cost pressure, volatile exchange rates and losses in some of the businesses are key potential hurdles in the near term. That apart, lack of fuel linkages and regulatory clearance, in some projects reduces medium-term revenue visibility. Among the few positive catalysts for the stock could be higher London Metal Exchange non-ferrous metal prices, though these depend on the global economic outlook.
On the back of these concerns, Sterlite’s share price has corrected 42 per cent in the past year. While the stock may remain subdued for a few months, many analysts believe it provides a good opportunity for long-term investors, as valuations have become attractive. At Rs 105.35, Sterlite’s market capitalisation works out to Rs 35,405 crore, attractive, given that it is sitting on net cash and cash equivalent of Rs 8,300 crore (adjusted for debt of Rs 15,100 crore) or a fourth of its market value. Based on 2012-13 estimated projections, it is trading at an enterprise value (EV; market value plus debt) to Ebitda (earnings before interest, taxes, depreciation and amortisation) of a mere three times and less than one time its book value.
Kawaljeet Saluja and Karan Durante of Kotak Institutional Equities, who believe volume growth may ease in FY13 and have cut their Ebitda estimates for FY13 and FY14, as well as fair value for the stock, say in their note on Sterlite, “We value the Sesa Sterlite (new entity after the Sesa Goa and Sterlite merger) business at Rs 210, based on sum-of-parts valuation (valuing a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another). Accordingly, fair value of Sterlite works out to Rs 126. We retain our ‘Add’ rating on the stock due to inexpensive valuations.”
|In Rs cr
|| -540 bps
|| -180 bps
|Consolidated figures E: Estimates, % change is y-o-y
Source: Capitaline, company, Emkay Global
Q4 impacted by lower prices
Sterlite’s performance for the quarter ended March 2012 (Q4) reflects the lower non-ferrous prices. Compared to the year-ago period, non-ferrous LME average prices were lower by 12-20 per cent in the quarter. Lower prices and higher input costs (especially of coal) were responsible for the 11.6 per cent decline in operating profits or 540 basis points decline in operating profit margins in Q4. Positively, strong growth in volumes (of silver, zinc and power) restricted the fall in operating profits and enabled a 7.6 per cent rise in sales.
At the net level, the decline was intensified due to a sharper rise in interest and depreciation costs, as well as an exceptional loss of Rs 423 crore on account of an unfavourable ruling by the US courts in connection with the cancellation of its share purchase agreement with Asarco in 2009. A Rs 331 crore foreign exchange gain, though, provided some relief. Net profit, thus, fell 33.7 per cent to Rs 1,277 crore in Q4.
Lack of positive triggers
The financial year 2011-12 closed with 35.4 per cent growth in revenue, led by volumes. However, Sterlite’s net profit fell 4.3 per cent on lower non-ferrous LME metal prices and a fall in operating profit margins, as a result of higher input costs. In 2012-13 as well, the concerns remain on these counts. Given the weak global economic environment, LME non-ferrous metal prices are expected to remain soft. In terms of volumes, too, there are concerns.
“Sterlite is facing hurdles in completion of its capacities or securing backward integration in each of its segments, except for Hindustan Zinc. The company’s failure to resolve the issues might limit its volume growth opportunities, as well as inflate the cost of production,” says Ravindra Deshpande, who tracks the company at Elara Securities.
The company’s copper smelter capacity expansion from 400,000 tonnes to 800,000 tonnes per annum at Tuticorin (Tamil Nadu) is on hold due to regulatory clearance. Vedanta Aluminium (VAL) is facing problems due to lack of captive mines and delays in alumina refining capacity. “VAL has been meeting half of its alumina requirement through imports and this situation is not likely to be resolved within next two years. Coal has been adding to the concerns due to various recent changes in supply agreements with Coal India,” says Jagdish Agarwal who tracks metals at Emkay Global. In FY12, VAL incurred a loss of Rs 2,618 crore as against a loss of Rs 958 crore in FY11.
In Balco, the company is expected to put up a 325,000-tonne aluminium smelter in the second half of 2012-13. However, production from this smelter will ramp up only gradually and depend on the captive power plant of 1,200 Mw, for which availability of coal is critical. In the power segment as well, the supply of coal is a key worry. The company has commissioned three units of 600 Mw each and another 600 Mw will be operational over the next few months. However, due to inadequate availability, the existing plant load factor (PLF or capacity utilisation) stands at 70 per cent. “The success of Sterlite’s power expansion projects is dependent on proper coal linkages. Though the company is hopeful of the necessary linkages and signing an FSA (fuel supply agreement) with Coal India, this could be a major challenge in the near future,” says Agarwal of Emkay.