sterliteinds_prabhudas_301010

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Sterlite industries

Worst seems to be priced in

October 26, 2010

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware th

the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer

to

important

disclosures

and

disclaimers

at

the

end

of

the

report

Kamlesh Bagmar

[email protected]

+91‐22

‐66322237

Rating Accumulate

Price Rs172

Target Price Rs201

Implied Upside 16.9%

Sensex 20,221

(Prices as on October 26, 2010) Trading data

Market Cap. (Rs bn) 581.7

Shares o/s (m) 3,361.6

3M Avg. Daily value (Rs m) 1863.5

Major shareholders

Promoters 52.80%

Foreign 12.89%

Domestic Inst. 8.32%

Public & Other 25.99%

Stock Performance

(%) 1M 6M 12M

Absolute (0.1) (18.2) (16.3)

Relative (1.0) (32.2) (37.1)

Price Performance (RIC: STRL.BO, BB: STLT IN)

Source: Bloomberg

0

50

100

150

200

250

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

(Rs)

Results marginally short of expectation:Sterlite industries (SIL) reported Pre‐exceptiona

PAT (attributable to shareholders) of Rs9.9bn, below PLe of Rs10.7bn and consensu

estimate of Rs11.0bn. While, on operating level, it reported Rs14.7bn against PLe o

Rs15.9bn and consensus estimate of Rs16.3bn.

Copper and power division led the underperformance: Copper division reported disma

set of numbers with an EBITDA of Rs2.1, below PLe of Rs3.3bn. The performance wa

impacted primarily due to lower than expected Tc/Rc margins at USc11.75/lb (PLe

12.74/lb) and higher than expected CoP at USc19.78/lb (PLe: 18.74/lb). Power division

reported an EBITDA of Rs0.7bn, significantly below PLe of Rs1.5bn on account of lowe

than expected realisations at Rs3.4 per unit (PLe: Rs4.3) and unit sales at 414m units

(PLe: 514m). However, better than expected earnings in Zinc business recouped partially

the depressed earnings in copper and power business. Aluminium division reported an

EBITDA of Rs1.6bn at par with PLe of Rs1.5bn.

Betting on the energy business: SIL’s first unit of 600MW of 2400MW got synchronised

during October

and

is

expected

to

commence

commercial

production

during

November

Likewise, II and III unit are expected to commence the commercial production during the

month of January and March respectively while, its final unit would come in to operation

by the end of Q1FY12. In addition to this, expansion of 1200MW in Balco would augu

the earnings from energy business with entire volumes available for sale in open market.

Valuation: At the CMP, the stock trades at P/E of 13.5x and 7.1x FY11E and

FY12E respectively, while on EV/EBITDA, it trades at 7.9x and 4.0x FY11E and

FY12E respectively. We maintain our ‘Accumulate’ rating on the stock given the

attractive valuations, increased share of non‐commodity earnings and

significant underperformance of the stock.

Key financials (Y/e March) 2009 2010 2011E 201

Revenues (Rs m) 211,442 244,103 246,729 336,7

Growth (%) (14.4) 15.4 1.1 36

EBITDA (Rs m) 47,041 60,718 71,422 129,9

PAT (Rs m) 32,641 40,003 43,218 82,1

EPS (Rs) 11.5 11.9 12.9 24

Growth (%) (26.9) 3.3 8.0 90

Net DPS (Rs) 0.9 0.9 1.2 2

Source: Company Data; PL Research Profitability & Valuation 2009 2010 2011E 201

EBITDA margin (%) 22.2 24.9 28.9 38RoE (%) 13.6 12.8 11.1 18

RoCE (%) 13.2 12.7 10.8 16

EV / sales (x) 1.9 2.1 2.3 1

EV / EBITDA (x) 8.7 8.6 7.9 4

PE (x) 15.0 14.5 13.5 7

P / BV (x) 1.9 1.6 1.4 1

Net dividend yield (%) 0.5 0.5 0.7 1

Source: Company Data; PL Research



October 26, 2010 2

Sterlite industries

Q2FY11 Result Overview

Y/e March Q2FY11 Q2FY10 YoY gr. (%) Q1FY11 H1FY11 H1FY10 YoY gr. (%)

Net Sales 60,290 60,855 (0.9) 59,245 119,535 106,226 12.5

Raw Material 27,705 32,616 (15.1) 26,790 54,495 53,771 1.3

% of Net Sales 46.0 53.6 45.2 45.6 50.6 Staff Costs 2,225 2,058 8.1 2,837 5,062 3,789 33.6

% of Net Sales 3.7 3.4 4.8 4.2 3.6 Power & Fuel 5,744 4,637 23.9 5,584 11,328 9,308 21.7

% of Net Sales 9.5 7.6 9.4 9.5 8.8 Other Expenses 9,880 8,327 18.7 9,518 19,398 16,350 18.6

% of Net Sales 16.4 13.7 16.1 16.2 15.4 Total Expenditure 45,554 47,637 (4.4) 44,729 90,283 83,217 8.5

EBITDA 14,736 13,218 11.5 14,516 29,252 23,009 27.1

Margin (%) 24.4 21.7 24.5 24.5 21.7 Depreciation 2,123 1,734 22.5 2,170 4,294 3,470 23.7

Other income

5,662

4,323

31.0 5,723

11,385

8,524

33.6

EBIT 18,274 15,807 15.6 18,068 36,342 28,063 29.5

Interest (222) 576 (138.6) 1,184 962 1,289 (25.3)

PBT 18,496 15,231 21.4 16,884 35,380 26,774 32.1

Extraordinary income/(expense) 240 (234) 1,425 1,665 (234) PBT (After EO) 18,736 14,997 24.9 18,310 37,045 26,540 39.6

Tax 4,555 2,593 75.7 3,685 8,240 4,898 68.2

% PBT 24.3 17.3 20.1 22.2 18.5 Reported PAT* 14,181 12,403 14.3 14,625 28,806 21,642 33.1

Minority interest (MI) 3,853 3,677 4.8 3,756 7,609 6,897 10.3

Share in

profit

or

loss

of

Associates

(247)

863

(128.6)

(785)

(1,032)

1,570

(165.7)

Reported net profit ** 10,080 9,589 5.1 10,084 20,165 16,315 23.6

Adjusted PAT* 13,992 12,597 11.1 13,586 27,578 21,836 26.3

Adjusted net profit ** 9,891 9,782 1.1 9,046 18,937 16,509 14.7

Source: Company Data, PL Research *Prior to MI and share in P/L of Associates ** Attributable to shareholders Segmental Breakup (Rs m)

Segment‐wise break‐up Q2FY11 Q2FY10 YoY gr. (%) Q1FY11 H1FY11 H1FY10 YoY gr. (%)

Revenue

Zinc and Lead 21,455 17,679 21.4 19,277 40,733 32,571 25.1

Copper 29,070 34,314 (15.3) 29,059 58,129 56,074 3.7

Aluminium 7,180 6,290 14.1 6,659 13,839 12,436 11.3

Power 1,628 1,617 0.7 2,587 4,214 3,411 23.5

EBIT

Zinc and Lead 10,029 9,922 1.1 9,051 19,079 16,932 12.7

Copper 1,579 1,719 (8.1) 1,878 3,456 2,658 30.0

Aluminium 1,258 691 82.0 497 1,754 1,441 21.7

Power 567 603 (5.9) 1,175 544 (135) (503.7)

Source: Company Data, PL Research



October 26, 2010 3

Sterlite industries

Prabhudas Lilladher

Pvt.

Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

22.4%

57.9%

17.8%

2.0%

0%

10%

20%

30%

40%

50%

60%

70%

Buy Accumulate Reduce Sell

% o

f

T o t a l C o v e r a g e

PL’s Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

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document

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Research

Division

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Prabhudas

Lilladher

Pvt.

Ltd.

Mumbai,

India

(PL)

and

is

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for

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by

the

recipient

only

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