Even as metal prices weaken, the company’s zinc, lead & silver businesses should provide cushion.
With declining base metal prices on the London Metal Exchange (LME), the stock of Sterlite Industries has lagged the broader market since end-July. It has lost almost 32 per cent in the past two months, including 4.5 per cent on Monday, the day it touched a 52-week low of Rs 115.05 before closing at Rs 117.30.
The non-ferrous metal major has interests in aluminium, copper, zinc and lead, as well as silver. With fears of a slowing in global growth, prices of most of these metals have fallen, especially in September. Copper is down almost 15 per cent, zinc by 14 per cent and aluminium by 10 per cent and are trading at their 2011 lows (see chart). However, given that zinc and lead (along with silver) account for a large portion of the company’s profits, and their production is seen rising, analysts say the same will help partly offset the pressure on profits, due to weak metal prices. They say, while the volatility in metal prices may keep the stock under pressure, most concerns seem factored in at current levels.
| UNDER PRESSURE | ||
| In Rs crore | FY11 | FY12E |
| Revenues | 30,248 | 40,397 |
| % change | 23.5 | 33.6 |
| Ebitda | 7,869 | 12,247 |
| Ebitda (%) | 26.0 | 30.3 |
| Net profit | 5,043 | 6,980 |
| % change | 34.7 | 38.4 |
| EPS (Rs) | 15.0 | 21.4 |
| P/E (x) | 7.8 | 5.5 |
| Source: CapitaLine, company, Bloomberg | ||
ALUMINIUM, COPPER
The aluminium segment had already reeled under pressure, with high cost of production on the back of higher coal costs and lack of availability of cheap bauxite for Vedanta Aluminium. While volumes had remained subdued and margins were under pressure due to firm coal costs, Motilal Oswal Securities estimates combined aluminium volumes from Balco and Vedanta Aluminium at 1,85,000 tonnes to rise seven per cent sequentially in the September quarter. However, strong realisations in the segment during the June quarter had saved the day for Sterlite.
The declining aluminium prices on the LME won’t bode well, as realisations will decline, too. Realisations are expected to fall as average LME aluminium prices are expected to decline 14 per cent to $2,250 a tonne in the September quarter, says an analyst. Margins, too, will be under pressure due to high coal costs. Further, analysts at ICICI Securities had expressed concern on lack of availability of cheap bauxite for Vedanta Aluminium, leading to higher costs. These trends indicate the business will face pressure in the coming quarter. However, aluminium is a smaller segment for Sterlite and contributed 12 per cent to revenues and seven per cent to profits during the June 2011 quarter on a consolidated basis. Hence, its impact on overall financials will not be meaningful.
High coal costs have also been responsible for rise in power production costs at Sterlite Energy. Its per-unit cost of production was Rs 2.6 in the June quarter against Rs 1.6 per unit during the June 2010 quarter, leading to lower profits. Analysts at ICICI Securities had observed that commissioning of two units of 600 Mw at the power subsidiary and their synchronisation remains doubtful till the coal distribution issues are solved. Further, analysts at Daiwa Securities also raise concerns on profitability, with power supplies to Vedanta Alumium at lower than merchant rates for the latter’s 1.25 million-tonne per annum smelter, to be commissioned in the near term (full ramp-up by the end of 2013-14).
On the other hand, copper prices on the LME have fallen the most since August 31. Copper is a key segment for Sterlite (about half the company’s revenues but, again, less than 15 per cent of Sterlite’s profits in June quarter) and no major volume increment is estimated for the September quarter (74,000 tonnes in the June quarter, which analysts peg at 76,000 tonnes in the September one). However, it is the treatment and refining charges (TcRc margins) that decide profitability and analysts observe that though with declining copper prices some decline may be seen in TcRc, it will not be substantial.
ZINC, SILVER SUPPORT
Zinc and lead is another major business segment for Sterlite. The profitability was being led by zinc on the back of robust performance by Hindustan Zinc, its 64.92 per cent subsidiary. Zinc and lead prices are also correcting. However, analysts feel volume expansions will limit the dent to revenues. Together, zinc, lead and silver account for three-fourths of Sterlite’s consolidated profits.
Though the June quarter had seen mined metal production at 188,000 tonnes in spite of a 15-day shutdown at its Rampur-Agucha mines, the production is estimated to rise in the September quarter, with no such shutdown. Further, a boost to volumes will come from the ramp-up of SK mines and the 100,000-tonnes per annum lead smelter during the current year. Notably, Sterlite has the lowest cost of production around the globe, which is a big positive, says Ravindra Deshpande, analyst at Elara Capital.
The rising silver production will also help Sterlite. The annual production of silver, a by-product in the lead business, will increase from 150,000 tonnes currently to 500,000 tonnes by the start of 2012-13. This will boost numbers in the medium term, due to volume and price expansion. On the whole, though zinc and silver prices have corrected, increasing volumes will offset some of the pains, say analysts, except if metal prices really tank from current levels.
