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Reacting to the strong set of numbers by Sterlite Industries for the quarter ended March 2013, its stock gained four per cent to close at Rs 95.45 on Tuesday. The company's net profit at Rs 1,925 crore was over 30 per cent higher than Street expectations of Rs 1,479 crore. This could have possibly led to an upgrade and more gains for the stock, but the recent news of the shutdown of the company's copper smelter for another week has cautioned analysts.
"I think the closing down of the copper plant could have about 15 per cent impact on the earnings, which is why at this point in time there is less scope for earnings upgrades," said Rakesh Arora, head of research, Macquarie Capital Securities.
"Because of plant shutdown, we have cut copper volume expectations. So, to that extent, the upgrades will be muted and thus we do not see material impact on share prices despite strong results," said Abhisar Jain, who is tracking the company at Centrum Broking. While analysts are awaiting further progress on the copper plant, they also see limited downside risk for the stock given reasonable valuations.
Bhavesh Chauhan, senior research analyst, Angel Broking, says: "Sterlite Industries reported better-than-expected Q4 FY2013 results both on the top line and net profit fronts. Net sales growth was driven by increase in all the segments. On the operating front, Sterlite's Ebitda (earnings before interest, taxes, depreciation and amortisation) grew 14.6 per cent year-on-year and Ebitda margin was 26.2 per cent (above our estimate of 23.1 per cent) mainly due to higher profitability from all the segments. We maintain our accumulate rating on the stock with a target price of Rs 98."
The India-based zinc and lead business, which comes under Hindustan Zinc (Sterlite holds a 64.9 per cent stake), accounting for about 30 per cent of total revenue, also aided in posting strong performance, especially at the operating level. Zinc reported 21 per cent growth followed by 49 per cent growth in silver. Silver's performance was aided by a 33 per cent growth in volumes to 117 tonnes in the March quarter. Power business, too, saw 12 per cent growth in volumes with PLF (plant load factor) moving up to 58 per cent in Q4 FY13, compared to 31 per cent in Q3 FY13. "We expect 50-60 per cent PLF for all four units in the near future with further easing of evacuation restrictions," said Sterlite in its press release. Power business also saw cost of production falling to Rs 1.76 per unit, compared to Rs 2.28 per unit in the year-ago period, aided by lower coal prices and higher caloric value coal.
Higher production, higher metal premiums (due to value-added products in aluminium) and lower costs helped partly offset lower metal prices in the quarter. In fact, operating profit margins increased from 25 per cent in the year-ago period to 26.1 per cent in the March 2013 quarter. In the December 2012 quarter, operating margins were at 21.7 per cent. The cumulative impact of volumes and margins saw net profits jumping 40 per cent year-on-year to Rs 1,925 crore.
The financial year 2012-13 closed with almost 10 per cent growth in revenue at Rs 44,922 crore and 25.5 per cent jump in net profit to Rs 6,060 crore. In FY14, the momentum of volumes could be lower given the shutdown of the company's copper plant and lack of volume growth in aluminium. Additionally, the recent fall in international non-ferrous metal prices will also have its implications in the coming quarters. That apart, its major subsidiary, Hindustan Zinc, is likely to see pressure, given the lower silver prices, which is likely to impact its profitability. Some of these pressures will be offset by increase in volumes in zinc and silver businesses, as well as power. Nevertheless, most of the concerns are already reflected in valuations.
At Rs 95.45, the stock is trading at a reasonable PE of 5.5 times based on its FY14 estimated earnings. Analysts at this point in time haven't changed their earnings estimates due to the copper plant closure. But, even if one assumes a 10-15 per cent downside risk to earnings in FY14 on this count, the PE works out to 6-6.25 times, which is still reasonable.
THE PERFORMERS
* Sterlite's copper segment, which accounts for half of total revenue, grew 17 per cent year-on-year in January-March 2013
* Copper cathode (pictured) production was at 86,000 tonnes, against 80,000 tonnes in the year-ago period
* The company's zinc business grew 21 per cent and silver 49 per cent
* Production cost for its power business fell to Rs 1.76 a unit from Rs 2.28 in the year-ago period on cheaper coal and higher caloric value of coal
