In the commodity business, when a price cycle turns up, sales and profits of companies increase disproportionately to their production growth. Sterlite Industries Ltd, the Vedanta Group non-ferrous company, finds itself in a happy position where the entire non-ferrous complex is doing well after last year’s slump.
Its consolidated net sales rose by 50% to Rs6,677 crore while its net profit after exceptional items rose by 42% to Rs731 crore. The company has provided for Rs273 crore for a payment to Asarco in connection with the bankruptcy proceedings in the US. Excluding this, profit has risen by about 90%.
Sterlite’s zinc and lead business was the star performer, with sales nearly doubling to Rs2,202 crore and segment profit jumping nearly fivefold to Rs1,306 crore. This business, operated by Hindustan Zinc Ltd, benefited because of higher London Metal Exchange prices and better efficiencies, which allowed it to easily absorb the effect of higher wages and a decline in by-product prices. The aluminium business suffered because of the closure of one smelter at Bharat Aluminium Co.
Graphics by Yogesh Kumar/Mint
Its flagship copper business did well, too, as revenues rose by 48% to Rs3,388 crore and segment profits rose by 45% to Rs144 crore. The copper business is mainly dependent on trends in treatment and refining charges.
Though the pricing situation is unfavourable for custom smelters such as Sterlite, the company earned higher realizations on by-products.
Sterlite’s relatively new power business has also become a steady contributor to performance, contributing Rs257 crore to sales and Rs109 crore to segment profits.
Sterlite has several expansion projects at various stages of commissioning, which will start production this year and next, during a period of strong commodity prices barring unforeseen circumstances. These are in the zinc and lead, aluminium and power businesses and will add significantly to its capacities and drive its sales and profit growth.
In the near term, capitalization of interest costs and higher depreciation costs will affect profit margins somewhat. The company has a balance of consolidated cash and cash equivalents of Rs25,257 crore, some of which will be deployed in its various projects. At Rs802, its share price trades at around 11 times its estimated fiscal 2011 earnings per share.
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