Sterlite Industries Ltd’s growth continues to be driven by the zinc and lead segment, its second largest revenue contributor. In contrast, lower bi-product sales and realisations continue to remain an overhang on its largest segment — copper. Going ahead, though the company is expecting a gradual improvement in TcRc (treatment and refining charges) margins (copper) and making strong efforts to improve profitability in the aluminium segment, the gains may not accrue soon, given its long-term contracts in the copper business. Sourcing of alumina, a key input, continues to be another challenge. The power segment supplies, affected by evacuation constraints post grid failures, are only expected to see a gradual recovery.
“While the recovery by the company is seen in the medium term, in the near-term clearances of Category B iron-ore mines in Karnataka can provide trigger to the stock,” feels Giriraj Daga at Nirmal Bang. Post-results, most analysts have target prices of Rs 105-115 for the stock trading at Rs 115.
Zinc & lead: The bright spot
The only bright spot for Sterlite in the December quarter was the zinc and lead segment (36 per cent to overall revenues), which grew 11.4 per cent year-on-year (y-o-y) and eight per cent sequentially. This was aided by higher mined metal production, which after seeing a subdued first half of FY13, has now started to grow as per mining plan. The mined metal content at 233,000 tonnes was higher by 22.6 per cent sequentially and 11 per cent y-o-y and it is expected to grow further in the current quarter. Per tonne LME prices of zinc and lead, too, have seen some recovery — at $1,947 and $2,199, these were up three and 11 per cent y-o-y.
| FAR FROM EXCITING | |||
| In Rs crore | Q3'FY13 | FY13E | FY14E |
| Net sales | 10,738 | 43,326 | 46,848 |
| % change y-o-y | 4.2 | 4.7 | 8.1 |
| Ebitda | 2,327 | 9,661 | 11,053 |
| Ebitda (%) | 21.7 | 22.3 | 23.6 |
| Net profit | 1,191 | 5,625 | 5,964 |
| % change y-o-y | 30.4 | 6.1 | 6.0 |
| EPS (Rs) | - | 16.6 | 17.7 |
| PE (x) | - | 6.9 | 6.5 |
| E: Estimates Consolidated financials Source: Emkay Global | |||
The major boost to the segment, however, came from more-than-doubling of silver (a by-product) to 117,000 tonnes, compared with the year-ago period (up 27 per cent sequentially). Integrated silver production was eight per cent higher in the quarter, driven by production ramp-up at SK Mine and improved utilisation of lead-silver refining capacities.
This segment is likely to continue doing well. In the long run, too, gains from higher output are expected, given Sterlite’s plans to grow its mine metal production.
Copper: Gains, some time away
Copper, the largest segment for Sterlite, contributing almost 47 per cent to revenues, reported subdued performance with revenues declining five per cent sequentially (up just 2.6 per cent y-o-y) led by lower by-product sales and realisations for sulphuric acid, phosphoric acid and anode slime. The cost of cathode production also increased impacting margins. Moving forward, demand outlook for phosphoric and sulphuric acid remains low, while the company anticipates lower acid realisations in the current quarter as well.
Though Tc/Rc at $12.4 was higher than $11.3 in the September quarter, improvement in the near-term is likely to be slower compared to the industry, given Sterlite’s long-term contracts with customers.
Positively, the first 80Mw unit of the 160Mw captive power plant at Tuticorin was commissioned in the December quarter and is operating at 80 per cent capacity. The second 80Mw unit is expected to be synchronised in the June 2013 quarter; the two should help lower costs for the company.
Power, aluminium to see gradual recovery
The power segment sales are yet to see improvement after being affected by continued evacuation limitations that were imposed after the northern and eastern region grid failure in August 2012. As a result, Sterlite Energy operated at only 31 per cent plant load factor (PLF) during the quarter. The segment (five per cent of overall revenues) is likely to see gradual growth and management is optimistic of PLF increasing to 50 per cent during the March 2013 quarter.
However, problems with the aluminium segment continue to compound. At Vedanta Aluminium, alumina production got hit with refining getting suspended at Lanjigarh on the back of poor bauxite (raw material) availability. The company, however, continues its efforts on improving its operating efficiency. In spite of having to use imported alumina, the cost of production of aluminium has been curbed.
On Vedanta Aluminium, analysts at Emkay observe that while alternative sources for bauxite are being looked into, the company is evaluating a possible trade-off between power sales and starting of its 1.25 million tonnes per annum (mtpa) smelter at Jharsuguda. They believe this won’t happen any time soon, as sourcing of alumina and power would continue to be overhangs. Positively, for Bharat Aluminium Co Ltd, its coal block has got Forest-II clearances. The benefits of this will be gradual and the company is expected to mine one mtpa of coal during FY14.
