Sterlite Inds: Robust volume growth

ANALYSTS' CORNER

Enam Securities rates Sterlite Industries as an 'Outperformer', relative to the sector. The report states that factors like robust volume growth, firm commodity prices and cost savings augur well for the company. It has access to quality mining resources, along with robust financials and future growth options.

In the second phase of expansion, future growth is expected to come from zinc and aluminium. The report sees the high volume growth in each business segment as a strong growth driver. In copper, the new smelter has commenced operation from May 2005 with capacity enhanced to 300,000 tpa from 180,000 tpa.

Volume growth is expected through export focus. In Zinc, the expansion is complete and the capacity has been expanded by 170,000 tpa to 390,000 tpa. Lead capacity will be expanded to 85,000 tpa in Q3 FY06.

Here the volume growth would be through domestic focus. In aluminium, technology trials have been completed for the new 250,000 tpa smelter. Commercial production would begin in FY06.

Reliance Inds: Pressure on margins

Merrill Lynch has recommended a 'Buy' on Reliance Industries, in its company update. The report states that margins are pressured, but the company remains unaffected. High raw material prices are putting pressure on petchem margins as producers have been unable to pass on sharply higher naphtha costs.

However, integrated producers like Reliance will not be impacted as it can source all of its naphtha inhouse. The negative six per cent annualised impact on FY06E earnings was offset by higher refining margins during September.

The report has valued the core business at 9x FY07E EPS (average of its historical range), including investments in subsidiaries as well as the upstream business. Another risk is that of project delays in upstream and delay in demerger.

Meanwhile, the company has hiked product prices for October by 2-7 per cent month-on-month across the board, except for polyester yarn where prices have been reduced.

Sasken Communication: Muted EPS growth

ICICI Securities, initiating coverage on Sasken, has recommended a 'Sell'. The report forecasts Sasken's EPS to grow at 4 per cent CAGR over FY05-07E.

Even though PAT is expected to grow at 35 per cent CAGR over the same period, EPS growth will remain muted due to the expansion in equity share capital from Rs 16.8 crore to Rs 27.5 crore. Even as relationships with large clients in the services business (84 per cent of revenues) and the product business (14 per cent of revenues) provide opportunities for growth in the future, risks include high client concentration in the services business and small size of the target market in the product business.

Considering Sasken's below-industry EBITDA margin (14.6 per cent in FY05) and RoCE (18 per cent in FY05), the report believes the stock is richly valued at FY06E P/E of 35.4x.

Moreover, licence revenues may go down further and adverse court rulings can have an impact on profits.