The consolidated March quarter results of Sterlite Industries India Ltd (SIIL) were above estimates. Net sales stood at Rs7,230 crore, earnings before interest, tax, depreciation and amortization (Ebitda) stood at Rs2,190 crore and adjusted profit after tax stood at Rs1,360 crore. SIIL reported earnings per share (EPS) of Rs16.20. The performance was mainly driven by higher realizations and higher premiums across product categories.
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The company has approved a bonus issue of 1:1 and stock split of 2:1 and has also recommended a dividend of Rs3.75 per share. Going forward, the stock is expected to be driven by any clarity on the minority buyout of Bharat Aluminium Co. Ltd (Balco) and Hindustan Zinc Ltd and also the performance of zinc and aluminium at the London Metal Exchange, which does not look grim.
The commissioning of Nyamgiri bauxite mines have been delayed as some approvals for the same are pending. The company expects to receive approvals soon, which will make company’s aluminium operations fully integrated. SIIL expects to reduce cost of production of aluminium to $800-900 per tonne after fully ramping up bauxite mines. In the fourth quarter of FY10, the average cost of production of aluminium at Balco was $1,677 per tonne.
The 2,400MW independent power plant (IPP) (under Sterlite Energy Ltd, or SEL) has been delayed by one quarter and the phase-I of 600MW is expected to be operational by the first quarter of FY11. The company will be reviving the 1,980MA captive power plant at Vedanta Aluminium Ltd (VAL), which will make the 2,400MW IPP free for the merchant market. However, this will take another two-three years to become operational. The company is also increasing copper smelting capacity by 0.4 million tonnes per annum (mtpa) and setting up associated captive power plant of 160MW, expected to be commissioned by mid-2011 at an estimated capital expenditure of $500 million.
The company is mulling to revive the deferred 1,980MW captive power plant under VAL, which will make the 2,400MW power plant under SEL free for selling in the market.
Out of the total 608 pots of 0.5 mtpa aluminium smelter at Jharsuguda, 536 pots have commenced operations. However, they will take some time to ramp up. The work on 1.25 mtpa aluminium smelter at Jharsuguda under Vedanta alumina and 0.325 mtpa smelter at Korba under Balco is progressing as per schedule.
SIIL is reviving the deferred 1,980MW Talwandi Saboo, Punjab, power plant under SEL (estimated capital expenditure of $2 billon). The plant is expected to be operational by the third quarter of FY14.
At the current market price, the stock is trading at 12.7 and 7.3 times its estimated FY11 and FY11 EPS of Rs66.20 and Rs115.40, respectively. On enterprise value (EV)/Ebitda basis, the stock is trading at 9.4 times its estimated FY11 attributable EV/Ebitda and at 5.4 times its estimated FY12 attributable EV/Ebitda; while on price/book value basis, the stock is trading at 1.4 times its estimated FY11 book value and at 1.1 times its estimated FY12 book value.
We believe, with growth in the rest of the world economy, the demand for base metals from the rest of the world will increase, which will provide further strength to the prices over the long term.
We maintain accumulate on SIIL with a revised target price of Rs934, which is based on sum-of-the-parts valuation.
Graphic by Ahmed Raza Khan/Mint