Higher realisation in metals and increased contribution from the power business should help Sterlite Industries post strong growth in profits in 2011-12.
Sterlite Industries, a leading and diversified base metal company, has seen its performance improve in the recent past. Although its December quarter numbers were somewhat subdued, they were in-line with Street expectations. However, recent news of the company’s arbitration on Balco (over its call option to buy government’s 49 per cent stake) not going in its favour saw Sterlite’s stock fall over 5 per cent on Thursday.
The good part is that analysts still expect the company to report an improved performance over the next 12-15 months, led by a better outlook for base metals, benefits of an increase in volumes and a higher contribution from the energy business.
| STRONG OUTLOOK | ||||
| in Rs cr | Q3FY11 | % chg * | FY11E | FY12E |
| Net sales | 8,332 | 24.2 | 29,577 | 33,425 |
| Ebitda | 1,978 | 10.4 | 7,089 | 10,507 |
| Ebitda (%) | 23.70 |
-260 bps | ||
| SOTP* VALUATION | |
| Rs / share | |
| Sterlite Copper | 28 |
| Vedanta | 9 |
| Balco | 15 |
| Hind. Zinc | 90 |
| Cash on books | 52 |
| Sterlite Energy | 22 |
| Copper mines | 6 |
| Total | 222 |
| Source: Analysts' estimates *Sum of the part | |
At the current level of Rs 170, while the stock looks attractively priced (PE of less than nine times the estimated consolidated earnings for 2011-12), analysts value it at about Rs 200-240 a share based on sum-of-part valuations, which include Sterlite's stake in Hindustan Zinc and huge cash in the books worth Rs 20,820 crore (Rs 52 per share).
Subdued, but in line
While Sterlite’s reported net profit was up 60 per cent year-on-year, adjusted profit (excluding expenses towards termination of the Asarco acquisition) was up nearly 22 per cent. The top line growth was backed by an increase in volumes, especially in the zinc business, and higher international metal prices.
On a year-on-year basis, average LME copper prices were up 28 per cent at $8,570 a tonne in the December 2010 quarter whereas aluminium gained 16 per cent ($2,361) and zinc 4 per cent ($2,329). However, Ebitda margins dropped to 23.7 per cent as against the 26.3 per cent last year due to higher input costs in the aluminium and zinc businesses. Additionally, a lower realisation in the power business at Rs 2.72 a unit (versus Rs 5.10) and higher input costs led to a 70 per cent decline in the power business Ebitda. On the whole, the pressure on operating profit margins was more than offset by lower interest costs and higher other income, helping the company report good growth in adjusted net profit.
Outlook
Analysts expect Sterlite's profits to grow 24 per cent to Rs 4,646 crore in 2010-11, which looks achievable given that it has clocked profits of Rs 3,117 crore in the nine months to December 2010. More importantly, the outlook for industrial metals is improving as a result of higher domestic demand and a revival in the developed economies. The average LME base metal prices have been ruling firm and are seen inching higher. In the month of January itself, they are higher by about 2-10 per cent (except Zinc, which is down 3.4 per cent) compared to the average prices in the December quarter. Over the next one year , analysts expect a further 8-10 per cent gain in the LME base metal prices from the current levels.
In addition to the price rise, they expect volumes to rise to some extent on the back of higher capacity in the zinc, lead and silver production in 2011-12. Additionally, over the next 2-3 months, commercial production of Sterlite's 600 Mw (two units) power unit is expected to start, providing support to revenue growth and overall operating margins; the latter is expected to rise to over 31 per cent from an estimated 24 per cent in 2010-11. The high operating margins in the power business (around 50 per cent), supported by a low cost of production (Rs 1.76 a unit) are among factors that will help boost the company's profits in 2011-12.
