Sesa Sterlite: Zinc, Copper drive performance

With output across businesses set to rise further, expect the company to deliver better numbers going ahead

Better than expected performance of the copper and zinc businesses in addition to cost benefits in aluminium business helped Sesa Sterlite post good set of numbers for the quarter ended September 2013.

These three segments, which account for about 72% of earnings before interest and tax (EBIT), also gained due to the weak rupee. Zinc (contributed 63% to profits) saw good growth in output of zinc and silver, while oil (22%) also saw some rise in production.

Though the September quarter results are not comparable due to the merger of Sesa Goa and Sterlite Industries as well as goodwill amortisation, the reported revenue of Rs 25,352 crore and net profit of Rs 2,394 crore came in higher than average estimates of Rs 16,240 crore and Rs 1,930 crore, respectively.

Even when compared to the proforma figures, which assume the effective merger date as April 1, 2013 against the actual (between August 17 and 26), the performance was better. Deutsche Research analysts say the EBIT was 9% ahead of their estimates.

Post results, the Street has turned positive as the focus now shifts to volume gains in copper, aluminium, power and iron ore businesses. While iron ore mining in Karnataka has commenced, mining in Goa is expected to start after the Supreme Court gives approval. In aluminium, Vedanta Aluminium’s refinery will see capacity being ramped up whereas Balco's coal block is expected to be operational by June 2014.

In power, the plant load factor or PLF is expected to reach to 50% as against 31% in September 2013 quarter. Besides, the first of the three units of 660 mw each of Talwandi Sabo power plant will be operational by March 2014 quarter. In copper as well, the benefits of recently commissioned smelter will accrue in the coming quarters.

Though most analysts have cut their EPS estimates for FY14 and FY15 due to amortisation of non-cash item, goodwill (relating to acquisition of Cairn India) they do not perceive it in negative light.

"Given the non-cash nature, we do not see this as a negative. We maintain an overweight rating with a with revised price target of Rs 240 (Rs 245 earlier) and while the stock has had a very sharp run-up, we maintain our view that Sesa Sterlite is likely to emerge as a key holding across India’s metals and mining or industrial sectors," said Pinakin Parekh, who tracks the company at J P Morgan in a note.

Importantly, if some of these businesses gain momentum, Ebidta and cash flows will get a boost. Also, once the company completes buy out of government's stake in Hindustan Zinc, a deal it has been pursuing for long, these will help lower debt and consequently, interest cost.

The company has gross debt of Rs 84,000 crore (net at Rs 35,923 crore) in the books and almost half of that is accounted by subsidiaries, while interest costs are manageable at a fourth of Ebidta of Rs 7, 224 crore for September quarter.