Volume, price gains boost prospects

Sterlite Industries’ shares, which underperformed the broader markets for most part of 2010, jumped 4.4 per cent to Rs 183 (up 7.5 per cent in last one week) on Monday, backed by a good set of results for the March quarter.

The company reported a strong 37 per cent y-o-y jump in consolidated net profit to Rs 1,951 crore on the back of a 40 per cent rise in sales at Rs 10 ,000 crore in the March quarter. With the performance significantly above expectations, the stock could get re-rated as a result of upgrades in the company’s earnings (EPS) estimates.

While the analysts were expecting an EPS of Rs 13-13.5 for Sterlite in 2010-11, the same came in at Rs 15.2 (16-17 per cent higher than expectations), helped by the strong March quarter performance. In fact, after the results, analysts have already raised their earnings estimates for Sterlite for 2011-12 and 2012-13 by 7-10 per cent and their stock price targets to Rs 206-220.
 

STRONG OUTLOOK
In Rs crore	FY10	FY11	FY12E	FY13E
Net sales	24,501	30,429	45,957	51,224
Ebitda	6,162	8,050	12,712	15,562
Ebitda margin (%)	25.2	26.5	27.7	30.4
Net profit	3,744	5,043	7,206	9,154
EPS (Rs)	12.0	15.2	21.4	27.2
Growth in EPS (%)	-

26.7 40.8 27.1 PE (x)15.312.08.66.7 RoNW (%)12.912.916.518.6 E: Estimates                                                                        Source: ICICI Securities  

SOTP VALUATIONS
	Rs per share
Sterlite copper	27
Balco	12
Hindustan Zinc	120
Sterlite Energy	34
Scorpean Zinc	11
Lisheen Zinc	12
Black Mountain	3
Total	219
Source: Emkay Research

They now expect its EPS to grow an average 33 per cent annually over the next two years, aided by gains from ongoing expansion, contribution from power business and firm metal prices. The company’s huge net-cash equivalent in the books worth Rs 11,000 crore or Rs 32 a share and strong operating cash flows provides comfort and should come handy in funding future growth.

BEATING STREET EXPECTATIONS
Sterlite, largest non-ferrous company in India with interests in aluminium, copper and zinc, benefited during the quarter on account of higher metal prices on the LME. Copper, which accounts for 48 per cent of its consolidated revenues, gained from a 33 per cent y-o-y rise in average LME prices (at $9,639 a tonne) during the quarter. Similarly, aluminium and zinc prices were up in the region of 4-15 per cent. Importantly, the company produced 50,000 kg of silver in the quarter, which yielded an average realisation of $31.9 an ounce compared to $16.9 an ounce in the year ago quarter.

However, more than the price, volumes in the zinc and power (1,200-Mw capacity put into operation) businesses have contributed to strong growth in revenues. Revenues from zinc, lead and silver (40 per cent of revenues) were up 62 per cent y-o-y. Contribution of international zinc operations and strong performance of Hindustan Zinc (a 64.9 per cent subsidiary of Sterlite) helped the company post better than expected growth in revenues. In totality, the production of refined zinc, which during the Q4 and 2010-11 was at a record 194,000 tonnes and 712,000 tonnes, was up 29 per cent and 23 per cent, respectively, compared with the corresponding periods.

These helped it overcome the subdued performance in the aluminium and power businesses. Aluminium business reported decline both in revenues and volumes. In the power business, while revenues were marginally up by 8.4 per cent, profit before interest and tax nose-dived 47.2 per cent. The latter is attributed to decline in demand and lower realisations (down 15 per cent at Rs 3.02 per unit).

GOOD VISIBILITY
The company closed 2010-11 on a good note with net profit growing by 36.9 per cent to Rs 5,057 crore, 12 per cent higher than estimated by analysts. From here on, barring near-term issues, including volatility in non-ferrous metal prices, regulatory risks attached to its Tuticorin copper project and Vedanta Aluminium project in Orissa (where Sterlite holds 29.5 per cent stake), analysts expect strong growth in Sterlite earnings over the next two years.

However, even if the metal prices were to remain at the current levels, the boost is expected to come from the energy business. The full impact of the recently synchronised two units of 600-Mw each in the March quarter alongwith expected synchronisation of balance two units of 600 Mw each in September and December 2012 quarters will be felt over the next two years. That apart, the ramp up in silver production to 500,000 kg in 2011-12 from 180,000 kg last year should also add to the total. The contribution from the international zinc business and expansion of aluminium capacities at Balco should also help drive growth and expansion in operating margins.