Sterlite Industries (India) Ltd’s June quarter results present a contrast when the year-on-year (y-o-y) growth figures are compared with the quarter-on-quarter (q-o-q) numbers.
The non-ferrous metal company’s revenue rose by 66% and operating profit margin (OPM) improved by about 3 percentage points y-o-y. But the same figures showed a decline on a q-o-q basis, with revenue down 2% and OPM falling 240 basis points.
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There are two main reasons for the decline. The acquisition of Anglo American Plc’s zinc business was completed in February. That created a low base effect, propping up y-o-y growth, which will continue till the March 2012 quarter. Also, metal prices are up significantly over a year ago, but have softened compared with the March quarter. That has also pulled down sequential growth.
All of this should not worry shareholders, as softer metal prices in the June quarter are already factored into the stock price. In fact, Sterlite’s net profit in the June quarter was slightly better than estimates.
Its zinc business takes credit, as it contributes about three-fourths to segment profit. Sales and profit of this business nearly doubled y-o-y. Mined metal production of the Indian zinc business was only 4% higher due to an unplanned shutdown at a mine, but refined zinc output rose 17% as its zinc smelter ramped up to full capacity. It also managed to raise output in the international business.
Average zinc prices during the quarter were 11% higher y-o-y, but down by 6% q-o-q. Production is expected to increase as the mine that underperformed is back on track. A new lead smelter and a silver refining unit will begin supplies in the September quarter.
The copper business has reported segment profit levels similar to the March quarter. This is despite lower output due to an unplanned shutdown of its smelter, as a negative cost of production (due to higher realization from by-products) and higher treatment and refining charges came to the rescue.
Sterlite’s aluminium business saw output decline by 3.5% y-o-y, but higher prices led to revenue rising 14%, while segment profit nearly tripled. Average aluminium prices at the London Metal Exchange (LME) were up by about 24% y-o-y and 4% q-o-q. This business will get a boost when a new smelter and captive power plant are commissioned in the September quarter.
Losses at Vedanta Aluminium Ltd increased due to higher interest and depreciation costs, and higher alumina and coal costs. The unit suffered a breakdown in June, which will affect performance in fiscal 2012.
Sterlite appears comfortably placed on the output front, with its projects expected to drive up production during the year. Power and fuel costs are key risks. As of now, higher product prices are providing adequate cover. The risk then is that of LME prices turning even softer, as that will mean q-o-q performance will deteriorate. This is the key long-term risk that investors should watch out for.
In the near term, 10 August is the date for the Supreme Court hearing on the Tuticorin smelter’s operation. The course of this case will have some effect on Sterlite’s valuation, especially if the final decision goes against it.
Graphic by Sandeep Bhatnagar/Mint
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