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Better than expected performance of the copper and zinc businesses in addition to cost benefits in the aluminium business helped Sesa Sterlite post a good set of numbers for the September quarter. These three segments (which account for 72 per cent of earnings before interest and tax or Ebit) also gained due to the weak rupee. Zinc (contributed 63 per cent to profits) saw good growth in output, while copper got a boost from 30 per cent jump in Tc/Rc margins.
Although the September quarter results are not comparable due to the merger of Sesa Goa and Sterlite Industries as well as goodwill amortisation, the reported revenue of Rs 25,352 crore and net profit of Rs 2,394 crore came in higher than average estimates of Rs 16,240 crore and Rs 1,930 crore, respectively. Even when compared to the proforma figures, which assume the effective merger date as on April 1, 2013 against the actual (between August 17 and 26), the performance was better. Deutsche Research analysts say the Ebit was nine per cent ahead of their estimates.
After results, the Street has turned positive as the focus now shifts to volume gains in copper, aluminium, power and iron ore businesses. While iron ore mining in Karnataka has commenced, mining in Goa is expected to start after the Supreme Court gives approval.
In aluminium, Vedanta Aluminium's refinery will see capacity being increased whereas Balco's coal block is expected to be operational by June 2014. In power, the plant load factor is expected to reach to 50 per cent against 31 per cent in the September 2013 quarter. Besides, the first of the three units of 660 Mw each of the Talwandi Sabo power plant will be operational by the March 2014 quarter. In copper as well, the benefits of recently-commissioned smelter will accrue in the coming quarters.
Although most analysts have cut their earnings per share estimates for FY14 and FY15 owing to amortisation of non-cash item and goodwill (relating to acquisition of Cairn India), they do not perceive it in negative light.
"Given the non-cash nature, we do not see this as a negative. We maintain an overweight rating with a with revised price target of Rs 240 (Rs 245 earlier) and while the stock has had a very sharp run-up, we maintain our view that Sesa Sterlite is likely to emerge as a key holding across India's metals and mining or industrial sectors," said Pinakin Parekh, who tracks the company at J P Morgan, in a note.
Importantly, if some of these businesses gain momentum, Ebidta and cash flows will get a boost. Also, once the company completes buyout of the government's stake in Hindustan Zinc, a deal it has been pursuing for long, these will help lower debt and consequently, interest cost. The company has gross debt of Rs 84,000 crore (net at Rs 35,923 crore) in the books and almost half of that is accounted for by subsidiaries, while interest costs are manageable at a fourth of Ebidta, of Rs 7, 224 crore for the September quarter.
