For FY08, Sterlite Industries registered a 2.2% y-o-y increase in net sales to Rs247.1 billion on the back of a higher sales volume. However, EBITDA declined by a sharp 18.4% y-o-y to Rs78.7 billion due to reduced realizations, and higher energy costs.
Adjusted net profit dipped by 3.6% y-o-y to Rs42.4 billion, supported by a lower depreciation and tax expense and higher other income.
Going forward, Sterlite’s production volumes are expected to increase substantially in FY09. New aluminium capacity of 250 ktpa is expected to be commissioned under Vedanta Aluminium Limited in FY09. Further, it has recently added 258 ktpa of zinc-lead production capacity and has announced plans to add another 310 ktpa of zinc-lead capacity by 2010.
Aluminium prices are expected to be higher in FY09 on the back of a strong global demand. We expect aluminium prices to average around $2,748 per tonne in FY09.
Rising prices of by-products such as sulphuric acid are expected to limit the effect of falling treatment and refining rates that slumped 50% y-o-y in FY08. The management expects them to fall further by 20-25% in FY09.
At the current market price (CMP) of Rs675.2, the stock is trading at an EV/EBITDA of 5.3x for FY09E and 5.1x for FY10E. Historically, the company has traded at an average EV/EBITDA multiple of 7.
Using this multiple, we arrive at a target price of Rs988 for FY09E, which provides an upside of 46.3% over the CMP. We maintain BUY rating on the stock.