Sterlite Industries: String of bad news

The recent Madras High Court order comes as a jolt for the company that was already reeling under a spate of bad news.

After being denied environmental clearance for the Rs 8,000-crore bauxite mining project in Orissa in August, the UK-based Vedanta Group received another setback on Monday, as Sterlite’s Tuticorin copper smelter plant was directed to shut operations by the Madras High Court due to environmental concerns.

This is a major jolt to the company, as it undermines its plan to become an integrated aluminium player. The Tuticorin plant had around 400 ktpa (kilo tonnes per annum) copper smelter capacity. Sterlite had undertaken plans to double this, besides setting up a 160-Mw captive power plant, which was to be commissioned by mid-2011. The outlay for the expansion stood at Rs 2,300 crore. Some of this investment has already been made. Besides losing production, Sterlite will have to pay its employees 16 days’ wages for every year of service, according to the court order.

On the earnings front, analysts at Prabhudas Liladher anticipate a 15 per cent impact on 2011-12E earnings (Rs 31,830 crore) if the decision is not revoked. Analysts have not provided immediate earning downgrades given the favourable rulings on litigation related to clearances for plants in the past.

Motilal Oswal had guided that Sterlite’s revenues will grow at a compounded annual growth rate of 35 per cent over 2010-12. This is now at risk. The stock has corrected around 23 per cent since the beginning of 2010 on various concerns, of which bauxite mining setback is the latest. Earlier, the energy arm’s long-term power sales agreement with Vedanta Aluminium was not welcomed as it undermined the other lucrative opportunities in the merchant power market.

Disproportionate capital that had been deployed from Sterlite Industries’ balance sheet into an associate company through inter-corporate deposits at the start of the current financial year had also worried analysts. The stock ended 8.5 per cent lower on Wednesday at Rs 161.5.