Sesa Sterlite: Performance of key segments a worry

Sesa Sterlite, which reported marginally better-than-expected results for the quarter ended March, saw its stock fall 1.4 per cent on Tuesday and an additional 2.8 per cent on Wednesday, as analysts fret about the performance of a few segments. Against the Street’s expectations of revenue of Rs 20,780 crore, the company reported net sales of Rs 20,894.4 crore. At Rs 1,621.55 crore, net profit was marginally higher than expectations of Rs 1,590 crore.

During the quarter, key segment zinc (India) reported a 23 per cent decline in mined metal at 200,000 tonnes, compared to the year-ago period. Flat zinc prices of $2,029 a tonne at the London Metal Exchange (LME) and a seven per cent increase in the cost of production (including royalty) at $1,068 a tonne led to an 18 per cent year-on-year decline in earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 1,711 crore.

“This segment could take another two-three quarters and if LME zinc prices improve, it could expand open-cast mining, driving benefits,” says Goutam Chakraborty, who tracks the company at Emkay Global Financial Services.

The oil & gas segment (Cairn India), which accounted for 55 per cent of the consolidated profit before interest and tax (Pbit), saw one per cent sequential growth in revenue at Rs 5,049 crore, while the Pbit rose 2.8 per cent. While Cairn India’s revenue and profit are up 16 per cent and 18 per cent year-on-year, respectively, for the March quarter, the segment saw a marginal sequential decline in realisations, owing to lower Brent crude oil prices of $108 a barrel, against $109 a barrel in the December quarter. For 2014-15, the production outlook was below Street expectations.

Though zinc and oil & gas account for about 90 per cent of the company’s profits, analysts are worried about the performance of its copper and power businesses.

The power segment reported a loss (before interest and tax) of Rs 94.4 crore for the March quarter, against a profit of Rs 98 crore in the December quarter. The loss was primarily due to a 21 per cent decline in power sales (units), lower plant load factor (PLF) and an eight per cent increase in generation costs.

“We reduce our FY15 EPS (earnings per share) three per cent to factor in lower PLF at the 2,400-Mw Jharsuguda IPP (independent power plant),” says Saumil Mehta, who tracks the company at IDFC Securities.

The copper business, too, saw pressure, despite a higher (up 25 per cent year-on-year) treatment charge/refining charge (refining) margin of 18.5 cents. At Rs 356 crore, this segment reported a five per cent year-on-year decline in Ebitda. Because of a shutdown of mining operations, losses in the iron ore segment increased 43.4 per cent to Rs 140.2 crore.

However, some issues in the zinc, power, iron ore and copper segments were offset by a better performance in the aluminium segment; the improvement was led by higher production and aluminium premia and rupee depreciation; the segment reported 15 per cent year-on-year growth in revenue, despite a 15 per cent decline in LME prices at $1,708 a tonne. But considering aluminium only accounts for about five per cent of the company’s consolidated Pbit, the impact was marginal.

Most of the issues highlighted in this quarter were already factored in by the Street, and this is a reason why analysts do not feel the March quarter results will have a major impact on Sesa Sterlite’s valuations and earnings expectations. On an average, the Bloomberg estimate suggest a target price of Rs 206.43 a share, against the current market price of Rs 185.10, a discount of 6.84 times on its one-year forward earnings.