Analysts say the current year could see a fall in revenues and profits even though prices of metals are up from the lows.

Metal companies have been badly hit by the global economic meltdown and Sterlite Industries has been no exception. India’s largest non-ferrous metals company reported a poor set of numbers for the second consecutive quarter ending March 2009. Consolidated revenues dipped 36 per cent to Rs 4,336 crore while net profits fell 54.62 per cent to Rs 598 crore.

This is primarily because non-ferrous metal (aluminium, copper, zinc and lead) prices are up by 4-7 per cent since March 2009 and 10-40 per cent since January 2009. This is also a reason why realisations are now expected to be better than earlier expectations.

Aluminium dented
Sterlite’s aluminium business, which accounts for about 18 per cent of consolidated sales, was impacted the most due to the higher cost of production.

In Q4FY09, this business reported a 27.7 per cent y-o-y decline in revenues to Rs 813 crore. Also, this segment witnessed a loss before interest and tax of Rs 49 crore in Q4FY09 against a profit before interest and tax of Rs 547 crore in Q4FY08.

Average LME aluminium prices fell 50 per cent y-o-y to $1,360 per tonne in Q4FY09. Besides, Sterlite had cut production by 7.6 per cent by shutting down one smelter as the production cost was higher because volumes dipped.

Sterlite is now looking to integrate its aluminium business as it starts mining at Nayamgiri bauxite mines. It is also ramping up its aluminium smelter in Jharsuguda, Orissa by Q1FY10, which will add 0.25 million tone of capacity, while another 0.25 million tonne will come up by March 2010.

With these initiatives the company expects the cost of production for aluminium to come down to $800-900 per tonne by the end FY10. Sterlite also hopes to earn more money by selling surplus power. It sold about 130 mw in Q4FY09, which analysts believe could go up to 250 mw in the coming quarters.
 

Copper crushed

The copper business, which accounts for 48 per cent of consolidated sales, was also hit. Copper revenues declined 37 per cent in Q4FY09 due to falling demand as well as lower international prices. During Q4FY09, average copper prices were lower by over 50-55 per cent at about $3,490 per tonne.

Analysts believe that treatment and refining margins for copper (Sterlite processes imported ore to make copper) are likely to improve with some rise in LME prices as compared to Q4FY09. At present, international copper prices are trading about 25 per cent higher at $4,300 per tonne compared to Q4FY09.

Also, the company has now signed the TC/RC (treatment and refining charges) contracts for FY10 at about $75 per tonne, which is higher by about 65 per cent compared to FY09. Besides better pricing, it has brought down production costs from 16.94 cent per lb in Q3FY09 to 12.79 cent per lb in Q4FY09, which could improve margins in the coming quarters.

Little zing in zinc
Sterlite’s zinc and lead businesses are housed in its 64.9 per cent subsidiary Hindustan Zinc, and account for a third of its consolidated revenues. During the quarter, zinc production was up 11.1 per cent, but higher volumes were negated as average zinc prices fell to $1,174 per tonne in Q4FY09 as against $2,426 per tone in Q4FY08.

Zinc prices have recovered 16 per cent and HZL will cut the cost of production from $621 per tonne (before royalty) to $550 per tonne.

But the weak performance may continue for the next two quarters due to a higher base of FY09. Although metal prices have recovered and the company has been able to bring down costs, analysts believe FY10 could see a decline in revenues by about 25-30 per cent and a fall in net profit by about 35 per cent.

Stable metal prices could result in earnings upgrades. “We believe things should only improve in all its businesses as LME prices are higher. Also, since the company is now reducing its cost of production, selling surplus power, adding new capacities and has signed the copper contracts at higher prices compared to last year, the benefit should accrue in the coming quarters,” says Rakesh Arora, who tracks metals at Macquarie Research.

Sterlite trades at 12 times estimated FY10 earnings, which is expensive given that revenues and profits could be under pressure this year. It’s true though that there’s cash on the books–estimated at Rs 14,000 crore, net of debt.
 

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