Sesa Sterlite: Growth triggers in place

Quarterly results largely in line with expectations; Street expects benefits from capex in recent months to begin showing

Sesa Sterlite's revenues fell short of Street expectations by about six per cent but higher profits helped compensate analysts' apprehensions. For the quarter ended December 2013, the company reported 7.7 per cent growth in revenue to Rs 19,414 crore, compared to the September quarter. However, profits grew 27 per cent to Rs 1,780 crore.

During the December quarter, the disappointment came particularly from the zinc international business. However, this was largely offset by better than expected performance in the copper, aluminium and power businesses.

The copper business, 34 per cent of revenue, witnessed quarter-on-quarter growth of 21 per cent in production and 37 per cent in revenue, led by higher refining margins.

While aluminium was largely flat sequentially, compared to last year the production was up one per cent because of the 74 per cent growth in alumina output at Lanjigarh (Odisha); revenues grew six per cent because of higher international aluminium rates. Also, because of the significant drop in production cost, the company achieved strong growth in aluminium margins. During the third quarter, Ebitda (earnings before interest, taxes, depreciation and amortisation) of the aluminium business grew 38 per cent to Rs 312 crore, which had a positive impact on the consolidated profitability.

Similarly, compared to last year as well as sequentially, the better performance of subsidiaries Hindustan Zinc and Cairn India (oil and gas business) helped the company report better performance at the operating levels. On a year-on-year basis, Cairn India saw 10 per cent growth in production and 17 per cent in revenue. Importantly, this had a huge impact on the earnings of Sesa Sterlite, as oil and gas accounts for 26 per cent of its consolidated revenue and 55 per cent of consolidated earnings before interest and tax. Strong performance in oil and gas was driven primarily by the production ramp-up at Rajasthan; 42 new wells were brought on line during the quarter.

Analysts are upbeat about Sesa Sterlite’s prospects in the coming months, as some key triggers could work in its favour and lead to re-rating of the stock. “It has several triggers like the acquisition of residual stakes in Hindustan Zinc (HZL) and Balco (Bharat Aluminium), start of the aluminium smelter and power plant operations at Balco, starting of a 1.25-million tonne smelter at Vedanta Aluminium (which would result in higher plant load factor at Sterlite Energy), commencement of iron ore operations at Goa and Karnataka, and ramp-up at the Talwandi Sabo (Punjab) power plant. Although, we do not like to assign a timeline, we see a higher possibility of these events happening in the next 12-18 months,” said Giriraj Daga, who tracks the company at Nirmal Bang Equities.

Further, analysts believe as most of the capital expenditure is already done, one could expect the additional cash generated, from the oil and gas and zinc business particularly, could be used for retiring debt. This will add to the valuation.

For FY14, analysts estimate the earnings per share at Rs 17.7 and see it growing to Rs 28.4 in FY15. Considering this, at the current price of Rs 194, the price to earnigns ratio is a reasonable 11.