With a Rs2,300 crore investment planned to double capacity by mid-2011, Sterlite Industries Ltd is securing organic growth for its copper business. The Vedanta Resources Plc flagship will add 400,000 tonnes of smelting capacity and a 160MW captive power plant at Tuticorin. The expansion plan has come as a surprise. Acquiring Asarco Llc was supposed to be Sterlite’s game plan to secure growth in the copper segment.
The company’s plans to raise fresh funds through a convertible notes issue has also comes as a surprise. It has raised another $500 million (Rs2,315 crore), through convertible notes at an interest rate of 4%. They can be converted into American depository shares (ADS) at a conversion price of $23.33 per ADS or a 40% premium to the pre-issue price. The company had recently raised $1.5 billion through an ADS issue. And before these two fund-raising initiatives, the company was already flush with cash worth around $1 billion.
The copper business contributed as much as 55% to Sterlite’s consolidated revenue in the last fiscal. But it contributed to only 25% of profit.
Graphics: Ahmed Raza Khan / Mint361
The zinc business contributed a much higher 55% to profit, although it’s smaller in revenue terms. Sterlite’s business model is that of a custom smelter: It buys copper concentrate from mines at a price linked to the London Metal Exchange copper price. Its profitability is linked to the TC/RC (treatment and refining charges) margin more than the copper price.
Countries such as China and India are expected to be key growth markets for the metal. In the first half of the current fiscal, Sterlite’s production grew by 13%. Even if it grows at 10% for the full year, it will be operating at a capacity in excess of 85%. That’s why it needs to add capacity.
Sterlite is setting up the new plant in a special economic zone, giving it a host of tax benefits. Also, Sterlite meets around 80% of its current power requirement at Tuticorin from captive power plant and waste heat recovery. After the expansion, all its power needs can be met in-house, and it can even sell surplus power. While the capacity expansion will take a few years to come on stream, Sterlite’s current performance is under pressure for a few reasons.
In the previous fiscal year, TC/RC charges fell by 25% to 12 cents a pound, affecting performance, but according to a company presentation in June, the charges had risen to around 19 cents.
Still, in the June quarter, the copper segment’s profit fell by 62% compared with the year-ago period. This was due to lower realizations of by-products, affecting profitability.
Sterlite’s share price has tripled in the past year, thanks to the recovery in commodity prices from their slump in 2009. While the worst is behind, the strength of the recovery from here will guide future valuations.
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