Sterlite Industries’ stock, which had nearly halved over five months to Rs 85 in mid-December, has risen 24 per cent so far in 2012 on the back of a 9-12 per cent rise in metal prices. The decent December quarter numbers, which Sterlite announced on Monday, has only helped the stock stand out; it gained 3.1 per cent versus the Sensex’s 1.46 per cent.
Going ahead, analysts believe scope for further gains in metal prices is limited and, hence, increase in volumes is imperative to drive growth. In this context, the progress of Sterlite’s expansion plans in the aluminium and power businesses are key monitorables. They are also concerned over the increase in funding to group companies.
While these concerns prevail, a lot of it is also factored in and reflects in the stock’s low valuations. On a sum of the parts basis, analysts value it at Rs 130-160 as compared to the current price of Rs 111.25, which translates into a price to earnings (P/E) ratio of six and a book value of 0.7 times 2012-13 estimates.
“We maintain our ‘buy’ on the stock on weak valuations and most problems being discounted in the stock price. While there are early signs of recovery, any progress on lower costs and clearances to coal mine or aluminium expansion would be a key trigger for the scrip,” says Alok Nemani, who tracks the company at Nomura Equity Research, in a note on the company. Among other triggers could be the government deciding to sell its stake in Balco, a deal Jagdish Agarwal, research analyst at Emkay Global Financial Services, believes could conclude in 2011-12 itself.
| MARGIN GAINS IN FY13 | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Net sales | 30,248 | 41,401 | 45,282 |
| Ebitda | 7,869 | 9,909 | 11,551 |
| Ebitda (%) | 26.0 | 23.9 | 25.5 |
| Net profit | 5,099 | 5,635 | 5,836 |
| EPS (Rs) | 15.2 | 16.8 | 17.4 |
| PE (x) | 7.2 | 6.5 | 6.3 |
| RONW (%) | 13.0 | 12.6 | 11.5 |
| All figures are consolidated; RONW is return on net worth; E: Estimates; Source: ICICI Securities | |||
Q3: Forex woes
Compared to the corresponding period last year, non-ferrous metal prices on the London Metal Exchange were on an average down by 10-18 per cent in the December 2011 quarter. Despite this, Sterlite reported a strong 23.5 per cent growth in revenue in the quarter due to strong volume growth in zinc, lead (up 102 per cent) and silver (up 37 per cent to 58,000 kg). Higher copper volumes also helped.
“The results were in line with the expectations. The positive thing is that on the operating front, Sterlite was able to bring down the cost of production at Balco and Vedanta Aluminium,” says Ravindra Deshpande, analyst at Elara Securities. This was led by copper, which witnessed a 75.5 per cent growth in operating profits on a 43 per cent increase in treatment charges and refining charges (Tc/Rc) margins at 15.9 cents per pound. Also, there was a reduction in cost of production in aluminium and power businesses (on better coal availability), leading to 17 per cent growth in consolidated operating margins. Net profits, though, were lower at Rs 914 crore, due to Rs 420 crore of forex losses.
Concern on fund use
Albeit marginally, Sterlite has raised funding (equity and debt) to Vedanta Aluminium. As of December 2011, this was Rs 10,175 crore — Rs 673 crore more compared to September 2011. “We believe the investment for Cairn’s acquisition has been partly funded by Sterlite,” says ICICI Securities analyst Abhijit Mitra in a note. He adds, “The management maintains this is a temporary measure, but increasing investments in a loss-making entity (Rs 2,076 crore in the nine months to December) continues to be a big investor concern.”
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Expansion plans
In the next two years, growth in volumes will be critical, considering that analysts do not see significant upside in metal prices. A possible delay in expansion of its aluminium and power businesses remains a worry. The company’s 325,000-tonnes-a-year aluminium smelter at Balco and 300-Mw captive plant (commissioning expected in Q2 of FY13 and Q4 of FY12, respectively) may face delays due to coal shortage and bauxite mine allocation.
Similarly, two of the four units (600 Mw each) of its power subsidiary, Sterlite Energy, have been commissioned, while another 600 Mw is running on a trial basis. Though management expects the fourth unit to get commissioned by June, analysts see a delay due to availability of coal. In fact, the existing two units are also running at only 50 per cent plant load factor, with the help of coal from e-auction and imports. Nevertheless, even after assuming some delays, analysts expect the power business’ contribution to rise.