Sterlite Industries (India) Ltd expectedly reported a sharp drop in profit on the back of lower commodity prices. A majority of the company’s consolidated profit is derived from the zinc and aluminium businesses. Prices of both these commodities have fallen sharply on a year-on-year basis. It’s no surprise, therefore, that the company reported a 65% drop in operating profit to Rs769 crore last quarter. The results, in fact, are slightly better than expected.
The company has managed to continue cutting production costs and also benefited from the recent improvement in copper TC/RC (treatment charges/refining charges) margins. Profit of the copper division rose by 18.5% last quarter. According to the company management, about 40% of the world production of zinc and aluminium is running losses at current commodity prices. Sterlite, however, is in an enviable position, with Ebitda margins (earnings before interest, taxes, depreciation and amortization) margins of around 50% in the zinc business. This division accounted for 55% of the company’s total operating profit last year. In the aluminium business, the company expects margins to rise to about the same levels once it is through with the process of full integration.
The company is expected to start mining bauxite this quarter at Niyamgiri hills in Kalahandi district of Orissa this year and as a result production costs are expected to fall. What’s more, the company has an enviable cash position of about $4 billion (Rs20,160 crore), which will help fund its various expansion plans.
But although the company enjoys relatively decent profit margins thanks to its low cost of production, earnings growth estimates have had to be pared after factoring in the drop in commodity prices. Another concern for the markets is the decision to acquire Asarco Llc. from a bankruptcy court. While the company has lowered its bid price considerably and also managed to ring-fence itself from Asarco’s legacy liabilities, the weak outlook on copper prices is a matter of concern. While copper prices are at $4,300/tonne currently, Citigroup had noted in a report last month that it expects prices to average $2,750/tonne this fiscal year. It’s important to note that Asarco’s cost of production is rather high at $3,100/tonne, and the acquisition may result in some cash burn, at least in the near term, if prices fall to the estimated levels.
The Sterlite stock, meanwhile, has risen by as much as 91% from its lows late last year, compared with a rise of about 33% in the Nifty. This is on the back of the recovery in metal prices from their lows last year. But considering the outlook on world economic growth remains weak and supply continues to exceed demand, the pressure on metal prices is expected to continue and, hence, sentiment for metal stocks may be weak.
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