Sterlite Industries’ results disappoint

Sterlite Industries’ results disappoint

Sterlite Industries (India) Ltd announced lower-than-estimated financial results for the quarter ended September. The company’s total consolidated operating income declined by around 1% over the same period last year to 6,084 crore. Growth in revenue was hit on account of a 15% decline in revenue from the copper business, which formed 48% of the total revenue.

Copper cathode production at the company’s Tuticorin smelter fell 26% due to a planned maintenance shutdown for 22 days beginning 22 June.

Also See Taking a Hit (Graphic)

Even as the copper business contributed about half of revenue, it accounted for just 11.6% at the earnings before interest and tax (Ebit) level. Ebit from the segment fell 11.5%. Margins in the business though improved by 23 basis points to 5.43% from 5.2% last year, due to a decline in costs. One basis point is one-hundredth of a percentage point.

Copper treatment charges and refining charges fell 18% and the outlook appears bleak as smelting capacity has increased faster than mining expansion, which has resulted in limited availability of copper concentrate.

Sterlite derived another major chunk (around one-third) of revenue from its zinc, lead and silver business, which increased by 21% driven by higher volumes and better LME (London Metal Exchange) prices. The company maintains that during the quarter, average zinc and lead LME prices were $2,013 (Rs 89,377 today) per tonne and $2,031 per tonne, respectively, compared with $1,762 per tonne and $1,928 per tonne, respectively, last year.

Zinc, lead and silver contributed 74% of Ebit in September, down 200 basis points, as margins shrunk sharply by 940 basis points to 47%. Margins were under pressure due to higher met coke and coal costs.

Sterlite’s aluminium business contributed 12% of the revenue and performed relatively better than the copper and zinc businesses. Analysts expect global aluminium prices to increase, led by higher domestic and international demand. Also, China’s move to cut aluminium production will help prices.

Sterlite managed to improve its overall operating profit margins by 150 basis points to 25%, as total raw material costs fell.

Operating income thus increased by 5% to around 1,530 crore. Profit before tax and exceptional items increased by 24% as other income grew impressively by 77%. Exchange gains on currencies also helped. However, net profit increased by 5% to 1,008 crore, the same as in the June quarter.

Profitability was affected on account of higher tax outgo and due to a loss in an associate company.

Meanwhile, Sterlite Industries’ stock has underperformed the Sensex and the BSE Metal index since the beginning of the fiscal. This is on account of a number of reasons—the company acquiring stake in Cairn India, final clearance not being granted for Niyamgiri mines and the recent Madras high court order for the immediate closure of the company’s copper smelting plant in Tamil Nadu.

The Supreme Court has extended the stay on the order till the second week of December.

“We are revising down Sterlite’s FY11 and FY12E profit after tax 8% and 4%, respectively, after factoring in lower volume growth in Hindustan Zinc and project delays in copper, VAL (Vedanta Aluminium), SEL (Sterlite Energy) and Balco (Bharat Aluminium Co.). While the various projects and environment related issues will be an overhang on the stock, we believe this has been factored in the stock price," wrote analysts from Edelweiss Securities in a note to clients on 7 October. Having said that, if the Supreme Court verdict is unfavourable for the company, the stock is likely to be hit even further.

Graphic by Naveen Kumar Saini/Mint

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