Sterlite Industries is a Vedanta-group company, with diversified operations in copper, aluminium, zinc and power, is well placed to weather the ongoing downturn.
It has been aggressively expanding capacities in almost all its divisions. Aluminium capacities will be doubled at Bharat Aluminium Company Ltd (BALCO) by September 2011E, to 0.72mtpa from 0.35mtpa currently, and the company is also setting-up aluminium capacities of 1.75mtpa in Vedanta Aluminium Ltd (VAL) by FY2013E.
After these expansions by the end of FY2013E, the total aluminium capacity will be 2.5mtpa, making it one of the largest aluminium producer in the world.
Through Hindustan Zinc (HZL), zinclead capacity is to be raised by 40% to 1.07mtpa by mid-2010E, making HZL the largest integrated zinc producer in the world.
Sterlite, through its wholly-owned subsidiary, Sterlite Energy, is foraying into the merchant power business in a power-deficit Indian market.
This will provide it with the flexibility to either use its power for captive purposes, or to sell the energy as merchant power.
We believe that the power business will contribute 15% of the Consolidated Revenues and 21.3% of the EBITDA in FY2012E, after the commissioning of the entire 2,400MW project.
We believe that Sterlite’s balance sheet is healthy enough to feed its expansions. Hindustan Zinc, a 64.9% subsidiary, is a cash-cow with a cash balance of $2 billion at the end of FY2009.
Sterlite has a net cash balance of $1.6 billion and the Vedanta parent holds another US $5 billion. The recent ADS issue of $1.6 billion would fund the company’s power expansions and other expansions. Hence, despite the huge capex plans of $7.9 billion, Sterlite’s debt-equity ratio of 0.3x in FY2011E is in a comfortable position.
We expect Sterlite’s consolidated revenues and net profit to grow at a CAGR of 11.3% and 20.5% respectively during FY2009-11E.
Due to the diversity of its businesses, we have valued Sterlite on a Sum-of-the-Parts (SOTP) Valuation and have arrived at fair value of Rs630.
At Rs629, Sterlite is trading at 16.7x and 10.3x its FY2010E and FY2011E Earnings, respectively. However, it is trading at 11.1x and 5.7x its FY2010E and FY2011E EV/EBITDA, respectively.
We initiate coverage on the stock with a NEUTRAL recommendation, and an SOTP-based target price of Rs630, at which Sterlite would trade at a P/E of 10.3x and an EV/EBITDA of 5.7x our FY2011E estimates.