Sterling show

Buoyant zinc and aluminium prices, and higher production help Sterlite Industries shine in Q2

Sterlite Industries has reported spectacular results for the September 2006 quarter, thanks to buoyant zinc and aluminium prices, as well as increased production volumes.

The company's consolidated operating profit grew a staggering 435 per cent y-o-y to Rs 2,574.60 crore in the second quarter of the current financial year, compared with 153.9 per cent growth in net sales to Rs 6,718.02 crore. Also, its operating profit margin surged 2,010 basis points y-o-y to 38.3 per cent in the last quarter.

Other non-ferrous players too saw operating profit margins increase. Hindalco, for example, witnessed its profit margin grow 300 basis points y-o-y in the September quarter.

Meanwhile, Sterlite's refined zinc production rose 18.2 per cent to 78,000 tonne compared with the same quarter of FY06. Also, the average zinc prices on the London Metal Exchange (LME) surged 159 per cent y-o-y to $3,363 a tonne in Q2 FY07.

Higher output and increased average prices on the LME, which were up 35.6 per cent y-o-y to $2,482 a tonne in the quarter, were the key growth drivers for its aluminium business.

As for the copper division, Sterlite was able to offset the weakness in spot TC/RC rates (treatment and refining charges) on the back of long-term contracts.

For the second quarter, the company's copper cathode production stood at 80,000 tonne, up 17.6 per cent y-o-y. Also, its TC/RC rates were 37.1 cents per pound in the last quarter, compared with 15.7 cents a year earlier.

Still higher zinc and aluminium prices, on a y-o-y basis, should help drive the company's growth over the next few quarters. Thus, the Sterlite stock, priced at 7 times estimated FY07 earnings, seems to be attractive.

Concor: On a high

Container Corporation of India grew its operational income on a y-o-y basis in the September 2006 quarter at the fastest pace over the last decade, analysts say. This was on the back of strong rail containerisation demand, coupled with growth in its exim throughput in the quarter.

The company's operating profit jumped 44 per cent, y-o-y, to Rs 252.2 crore in the September quarter, compared with 31.9 per cent growth in its income from operations at Rs 769.33 crore.

The 38.5 per cent growth in its exim division revenues, which was partly owing to earlier tariff hikes, helped the company offset 44.4 per cent y-o-y rise in rail freight expenses at Rs 423.86 crore in the last quarter. As a result, its operating profit margin grew 280 basis points y-o-y to 32.8 per cent.

The company revised its tariffs effective from November 2006, in a bid to offset the increase in railway haulage charges planned by the railways.

Apart from protecting its margins, the company is well positioned to leverage the growth opportunities from the country's expanding foreign trade.

However, with the stock trading at 19 times estimated FY07 earnings, Dalal Street appears to have factored in the company's growth potential.

Ashok Leyland: Weak margins

A huge rise in raw material costs "� of 490 basis points "� dented Ashok Leyand's adjusted operating profit margins for the September quarter by about 170 basis points, pushing them down to just under 8 per cent.

A lower proportion of the high-margin buses in the product mix at just 19 per cent compared with 32 per cent in Q2 FY06 also affected the margins.

Thus, despite a very strong sales growth of 34 per cent y-o-y, the operating profit rose just 16 per cent. After adjusting for the one-time income from the sale of shares in IndusInd Bank, the net profit was up just 7 per cent.

Given the fairly good growth in the commercial vehicle sector, the sales momentum should continue and Ashok Leyland could well end FY07 with a CV sales growth of around 25 per cent y-o-y.

The company's new plant in Uttaranchal with a capacity of 25,000 units is expected to be operational by FY08-end. This should improve its sales in the north, which currently contribute around 25 per cent to the company's total revenues. The capacity at its existing plants will go up to 95,000 units from 77,000 units once the expansion is complete.

It also plans to scale up capacity at its recently acquired company Avia in the Czech Republic, from 2,000 units to 5,000 units. By using some products from India, such as gearboxes and axles, for exports to Africa and West Asia, Avia should be able to expand margins, which are currently at around 4-5 per cent.

At the current price of Rs 43, the stock trades at just under 14 times FY07 estimated earnings and 11.5 times FY08 earnings.

While margin pressures may continue for a while, the stock is reasonably valued given the buoyancy in CV sales and the strategic initiatives being taken by it to de-risk the business.

With contributions from Amriteshwar Mathur and Shobhana Subramanian