The effective date for Sterlite Industries Ltd’s bonus and stock split, and China’s decision to move to a flexible yuan-dollar peg together gave a surprise 8.8% push to the company’s share price on Monday. Sterlite shareholders having 100 shares with a face value of Rs2 each will get 400 shares of Re1 each, after the stock split and bonus issue. The face value of a share has been split from Rs2 to Re1 and the company has given one share as a bonus for every share held.

Theoretically, nothing really changes for a shareholder in a bonus or a stock split except the number of shares going up. In Sterlite’s case, however, the move also coincided with China’s decision to give in to pressure to revalue the yuan. In recent months, non-ferrous commodity prices have tumbled due to fears of what may happen next in Europe and an expected slowdown in China’s appetite for metals. Expectations are that a revaluation would make Chinese imports cheaper, which will lead to higher imports and improve demand for its traditionally imported commodities.

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Sterlite’s share price on Friday was down by 18% compared with three months ago, as prices of non-ferrous metals had fallen. The company’s consolidated revenue of Rs24,410 crore chiefly came from selling copper (51% of revenue), aluminium (11%), and zinc and lead (32%). Power is a relatively smaller contributor at present, but will contribute to a larger share as its power projects take off.

The company’s copper business profitability is not directly influenced by copper prices, limiting the impact of higher prices on its business. It runs a custom smelting operation, buying copper concentrate from copper miners and earns a margin known as treatment and refining charges. These charges depend on the demand-supply situation, which is at present in favour of miners, as smelting capacity is in excess of concentrate availability. But Sterlite will benefit from larger volumes in its key businesses, as it has expansion plans under way in all of them. These are being implemented in phases, with some such as a zinc smelter that has already been commissioned while others such as aluminium and copper under implementation.

Sterlite is also confident that its expansion plans will also lead to lower per tonne cost of production in its key businesses. That and higher volumes should give a boost to performance. But these are all known factors. The sharp jump in its share price can be explained chiefly by the U-turn in the outlook for commodities. Whether this rise sustains will depend on its performance in the next few quarters and how its expansion plans impact the company’s profitability. The stock at present trades at around 10 times its consensus fiscal 2011 earnings per share, which is a fair valuation for a commodity stock.

Graphic by Ahmed Raza Khan/Mint

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