Analysis: Sterlite Industries: Regaining Street confidence

Analysts are turning positive on reasonable valuations and better contribution from zinc, power and copper businesses

Sterlite Industries is once again attracting analysts’ attention, especially after the recent quarterly results which were ahead of expectations. Many of them are now turning positive on the company due to reasonable valuations. More importantly, analysts believe that contribution of zinc, power and copper segments is going to be better than expected, helping the company sustain decent growth rates. Thus, they have raised the target price for the company to about Rs 125-130 per share, which is almost 25-30% higher compared to its current share price at Rs 100. Given lower uncertainties and better visibility now, there is also a possibility of the stock getting rerated.

"We like Sterlite Industries as we believe most of the negatives (largely regulatory) are now priced in and the valuations are attractive at 5 times financial year 2014 price to earnings. Also, with the impending merger, Sterlite has a well-diversified business model with high quality zinc and oil assets and steady expansion plans across verticals," says Varun Lohchab who tracks the company at Religare Capital Markets.

Q2: Ahead of expectations

Sterlite, which is a leading player in the non-ferrous space, reported a whopping 71% year-on-year growth in adjusted net profit at Rs 1,743 crore for the quarter ended September 2012. This came despite a mere nine% growth in revenues to Rs 11,103 crore and marginal increase of 1.8% in operating profit to Rs 2,527 crore. Though net profits were boosted by forex gains of Rs 219 crore, higher other income and lower interest cost, the operational and overall performance was better than expected. This saw the stock rise nearly 2% on Thursday, against a mere 0.3% rise in the Sensex.

Notably, led by higher LME prices, the realisation across segments was better than the June 2012 quarter, which along with volume gains in the aluminium and power businesses saw the operating profits rising by 9% to Rs 2,453 crore—more than double the 4.1% rise in sales.

During the quarter ended September 2012, Sterlite Energy generated 1,940 million units, up by 71% compared to the year ago period, as a result of higher sales and plant load factor at its Jharsuguda-based 2,400 mw power plant. The aluminium business also earned higher realisations (premium over LME prices) due favourable regional demand-supply situation, a trend likely to sustain in the near-term. However, the gains from the aluminium and energy businesses were offset by poor performance of the copper and zinc businesses, which witnessed lower volumes and decline in margins.

Outlook

Going ahead as well, analysts expect realisations to remain better in the next year across segments. However, production in the copper and aluminium businesses is expected to remain stagnant. Vedanta Aluminium started a one million tonne (MT) alumina refinery, but the same is facing challenges in terms of sourcing of bauxite, a key input.

At BALCO, the first power unit (300 mw) of the 1,200 mw plant and a smelter is expected to commence operation over the next two quarters, but analysts are not confident of any volume gains here as well. "We are not considering any aluminium production from this plant in our forward estimates. The company is negotiating with Coal India to sign FSAs for two out of four units of 300 mw of this 1,200 mw power plant," says Prasad Baji, analyst at Edelweiss Securities in a recent note on the company.

In contrast, the volume gains could come from the zinc business. The company said that the Rampura Agucha underground mine and Kayar mine projects are progressing well to deliver commercial production in financial year 2014. Analysts thus, are expecting zinc production to go up from 700,000 tonnes per annum to 750,000 tonne per annum.

Similarly, the number of power units that the company could sell next year is expected to be double, given the developments at its power business (Sterlite Energy). The company said that coal sourcing is no longer a constraint for Sterlite Energy and there is a possibility of PLF (plant load factor) increasing from 50% in September 2012 quarter to 75% in the coming quarters. Additionally, the first unit of Talwandi Saboo power plant (three units 600 mw each) is expected to be synchronised in the second quarter of the financial year 2014, which will further add to volumes.