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| India Infoline Research Team / 10:12 , Apr 27, 2012 |
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CMP Rs105, Target Rs123, Upside 17.2%
- Q4 FY12 revenue increased 5% qoq and 7.6% yoy to Rs108bn; but lower than our estimate of Rs114bn
- The underperformance in topline was largely due to lower contribution of copper and international zinc division
- Performance in copper business at EBIT level declined due to lower sales of by-products and steady Tc/Rc margins
- BALCO’s aluminium business reported an EBIT of Rs234mn due to an increase in global aluminium prices
- Contribution from international zinc assets declined marginally to Rs2.2bn, lower than our expectations; volumes to decline 10% over the next two years
- VAL managed to double its EBIDTA on a qoq basis on the back of higher aluminium prices and a decline in costs
- Cost of production under SEL decreased from Rs2.47/unit in Q3 FY12 to Rs2.3/unit on account of higher availability of linkage coal. SEL commercialized 2 units of 600MW during the quarter.
- Zinc to drive earnings over the next two years, maintain BUY with a revised 9-month price target of Rs123
Result table
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Net sales |
108,189 |
103,037 |
5.0 |
100,561 |
7.6 |
| Raw material costs |
(48,512) |
(49,147) |
(1.3) |
(45,184) |
7.4 |
| Personnel costs |
(4,152) |
(4,150) |
0.1 |
(3,675) |
13.0 |
| Other overheads |
(28,471) |
(26,557) |
7.2 |
(21,108) |
34.9 |
| Operating profit |
27,054 |
23,183 |
16.7 |
30,594 |
(11.6) |
| OPM (%) |
25.0 |
22.5 |
251 bps |
30.4 |
(542) bps |
| Depreciation |
(5,072) |
(4,575) |
10.9 |
(3,520) |
44.1 |
| Interest |
(3,280) |
(3,234) |
1.4 |
(1,041) |
215.1 |
| Other income |
7,035 |
6,174 |
13.9 |
7,254 |
(3.0) |
| PBT |
25,737 |
21,549 |
19.4 |
33,287 |
(22.7) |
| Tax |
(4,867) |
(5,053) |
(3.7) |
(5,663) |
(14.1) |
| Effective tax rate (%) |
18.9 |
23.4 |
|
17.0 |
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| Other prov / minority etc |
(7,097) |
(7,296) |
(3) |
(8,050) |
(12) |
| Adjusted PAT |
13,774 |
9,199 |
49.7 |
19,575 |
(29.6) |
| Adj. PAT margin (%) |
12.7 |
8.9 |
380 bps |
19.5 |
(673) bps |
| Extra ordinary items |
(1,005) |
(64) |
1,462 |
(325) |
209 |
| Reported PAT |
12,769 |
9,135 |
39.8 |
19,250 |
(33.7) |
| Ann. EPS (Rs) |
15.2 |
10.9 |
39.8 |
22.9 |
(33.7) | Source: Company, India Infoline Research
Topline underperformed due to lower contribution from copper
Q4 FY12 revenue jumped 5% yoy to Rs109bn, lower than our estimate of Rs114bn. The underformance in topline was largely due to lower contribution of copper division and international zinc division. The impact of lower copper and Zinc global performance was offset by higher domestic zinc and lead business revenues. Power contribution too increased with the commissioning of 2 units of 600MW during the quarter. The increase in topline was due to higher metal prices on a qoq basis.
Segmental performance
|
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY12 |
Q3 FY12 |
| Sales (Rs m) |
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Sales Contribution (%) |
| Copper |
49,454 |
49,351 |
0.2 |
45.9 |
48.2 |
| Aluminium |
8,687 |
8,009 |
8.5 |
8.1 |
7.8 |
| Zinc and lead - India |
30,616 |
27,265 |
12.3 |
28.4 |
26.6 |
| Zinc and lead - Global |
10,095 |
10,289 |
(1.9) |
9.4 |
10.0 |
| Power |
7,370 |
5,910 |
24.7 |
6.8 |
5.8 |
| Total |
107,628 |
102,462 |
5.0 |
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| EBIT (Rs m) |
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EBIT contribution (%) |
| Copper |
2,728 |
3,260 |
(16.3) |
11.0 |
15.1 |
| Aluminium |
234 |
(230) |
(201.7) |
0.9 |
(1.1) |
| Zinc and lead - India |
14,838 |
12,504 |
18.7 |
60.0 |
57.9 |
| Zinc and lead - Global |
2,215 |
2,353 |
(5.9) |
9.0 |
10.9 |
| Power |
1,516 |
533 |
184.4 |
6.1 |
2.5 |
| Total |
24,733 |
21,613 |
14.4 |
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| EBIT margins (%) |
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bps qoq |
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| Copper |
5.5 |
6.6 |
(109) |
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| Aluminium |
2.7 |
(2.9) |
557 |
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| Zinc and lead - India |
48.5 |
45.9 |
261 |
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| Zinc and lead - Global |
21.9 |
22.9 |
(93) |
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| Power |
20.6 |
9.0 |
1,155 |
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| Total |
23.0 |
21.1 |
189 |
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| Source: Company, India Infoline Research
BALCO aluminium costs continue to remain high
BALCO’s aluminium division during the quarter registered an increase of 8.5% qoq in topline on account of higher aluminium prices. Aluminium production remained flat yoy and lower qoq. Cost of production increased 2% qoq due to higher power costs. The company managed to report profit on the back of higher aluminium prices after suffering losses in the previous two quarters.
BALCO’s quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Aluminium production (Tons) |
62,000 |
63,000 |
(1.6) |
62,000 |
- |
| Revenue (Rs mn) |
8,000 |
8,010 |
(0.1) |
8,380 |
(4.5) |
| EBIDTA (Rs mn) |
950 |
320 |
196.9 |
2,300 |
(58.7) |
| PAT (Rs mn) |
460 |
(170) |
(370.6) |
1,160 |
(60.3) |
| Avg LME Aluminium prices (US$/ton) |
2,214 |
2,113 |
4.8 |
2,535 |
(12.7) |
| Net CoP - Cathode (c/lb) |
1,918 |
1,880 |
2.0 |
1,781 |
7.7 | Source: Company, India Infoline Research
The first metal tapping from the 325ktpa aluminium smelter project at BALCO is postponed to Q3 FY12. The construction of the 1,200MW captive power plant at BALCO is progressing well and the company expects to sell the entire output from the power plant on a merchant basis. The first unit of 300MW of 1,200MW is expected to be synchronized in Q1 FY13. The company expects to get the final clearance for its coal mines by next quarter and expects it to start by Q3 FY13.
VAL continued to bleed
Vedanta Alumina Ltd (VAL) continued to report losses due to the high cost nature of its operations. Costs for the company continued to remain high at US$1,930/ton in Q4 FY12. However, it was marginally lower than US$2,004/ton in Q3 FY12 and US$1,949/ton in Q4 FY11. Both, alumina and aluminium, production was higher due to increase in supplies of coal. The decline in production costs coupled with higher aluminium prices lead to a 117.6% jump in operating profit. The decline in costs was largely due to the improved operational efficiency. The 1.25mtpa Jharsuguda-II smelter project is in the final stages of completion and Sterlite continues to evaluate the start-up date of the smelter.
Vedanta Alumina’s quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Aluminium production (Tons) |
115,000 |
107,000 |
7.5 |
108,000 |
6.5 |
| Alumina production (Tons) |
240,000 |
236,000 |
1.7 |
184,000 |
30.4 |
| Revenue (Rs mn) |
16,630 |
14,440 |
15.2 |
15,630 |
6.4 |
| EBIDTA (RS mn) |
2,220 |
1,020 |
117.6 |
2,480 |
(10.5) |
| PAT (Rs mn) |
(5,420) |
(8,930) |
(39.3) |
(2,680) |
102.2 |
| SIIL Share (Rs mn) |
(1,600) |
(2,640) |
(39.4) |
(800) |
100.0 |
| Avg LME zinc prices (US$/ton) |
2,214 |
2,113 |
4.8 |
2,535 |
(12.7) |
| Alumina CoP (US$/ton) |
350 |
323 |
8.4 |
319 |
9.7 |
| Aluminium CoP (US$/ton) |
1,930 |
2,004 |
(3.7) |
1,949 |
(1.0) | Source: Company, India Infoline Research
Copper business EBIT declined due to lower by-product sales
Revenue of Rs54bn from the copper division was higher by 5.2% on a qoq basis on the back of higher copper prices. The impact of higher realization on topline was somewhat reduced by lower cathode production. Copper production decreased from 84,000 tons in Q3 FY12 to 80,000 tons in Q4 FY12. Tc/Rc margins during the quarter decreased marginally from 15.9USc/lb in Q3 FY12 to 15.3USc/lb. The company has taken a loss of Rs4.23bn towards the liability which can be incurred on the suit filed by ASARCO. ASARCO had filed a suit in US Court against Sterlite for the alleged breach of the Purchase and Sale Agreement signed in May 2008. The Court in February 2012 also ruled in its favour and asked Sterlite to pay net incidental damages of US$82.75mn after adjustment of US$50mn paid to Asarco in December 2009. The construction of the captive power plant at Tuticorin is complete and the first unit would be synchronised this quarter.
Copper business quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Mined Metal Content (Tons) |
5,000 |
6,000 |
(16.7) |
5,000 |
- |
| Cathodes (tons) |
80,000 |
84,000 |
(4.8) |
80,000 |
- |
| Revenue (Rs mn) |
53,990 |
51,300 |
5.2 |
52,930 |
2.0 |
| EBIDTA (RS mn) |
4,040 |
3,950 |
2.3 |
3,500 |
15.4 |
| PAT (Rs mn) |
1,390 |
3,470 |
(59.9) |
3,170 |
(56.2) |
| Avg LME copper prices (US$/ton) |
8,316 |
7,540 |
10.3 |
9,636 |
(13.7) |
| Net CoP - Cathode (c/lb) |
4.1 |
2.4 |
70.8 |
1.0 |
314.1 |
| Tc/Rc (c/lb)) |
15.3 |
15.9 |
(3.8) |
11.3 |
35.8 | Source: Company, India Infoline Research
HZL EBIT was boosted by a jump in production of lead and silver
HZL’s topline of Rs31.3bn was 12.5% higher on a qoq basis, led by an increase in lead and silver production from the new capacities. Zinc production volumes remained flat qoq to 190,000 tons as the company had closed down the Vizag smelter on account of higher transportation costs. Metal premiums too increased on a qoq basis. Mined metal output increased 6.7% qoq on the back of higher contribution from SK mine. Silver production (excluding internal consumption) increased by 56.3% qoq due to higher contribution from the new lead smelter and the new silver refinery. Silver production ramp up was also due to higher silver content in the ore from SK mine. Operating profit increased by 18.3% qoq to Rs16.6bn (higher than our estimate of Rs15.5bn). OPM expanded by 260bps to 52.9% due higher metal prices. Raw material costs remained high as the company had to buy lead concentrate from the open market. Raw material costs for purchase from external sources which were nil last year increased to Rs0.8bn during the quarter. Rest of the cost headers per ton of metal remained flat on a qoq basis. Net zinc metal cost without royalty, during the quarter increased marginally on a qoq basis in rupee terms to Rs41,693/ton from Rs40,300/ton in Q3 FY12.
Zinc-lead India’s quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Total mine metal (Tons) |
223,000 |
209,007 |
6.7 |
231,039 |
(3.5) |
| Zinc metal refined prod (Tons) |
190,000 |
191,000 |
(0.5) |
193,450 |
(1.8) |
| Lead metal refined prod (Tons) |
37,000 |
29,000 |
27.6 |
17,448 |
112.1 |
| Silver production (Tons) |
88 |
58 |
51.7 |
50 |
76.0 |
| Revenue (Rs mn) |
30,620 |
27,260 |
12.3 |
31,820 |
(3.8) |
| EBIDTA (RS mn) |
16,420 |
13,730 |
19.6 |
19,560 |
(16.1) |
| PAT (Rs mn) |
14,180 |
12,780 |
11.0 |
17,690 |
(19.8) |
| Avg LME zinc prices (US$/ton) |
2,037 |
1,912 |
6.5 |
2,416 |
(15.7) |
| Zinc CoP without Royalty (US$/ton) |
828 |
785 |
5.5 |
979 |
(15.4) | Source: Company, India Infoline Research
Global zinc assets contribute Rs3.7bn at operating level
Performance from the international zinc assets continued to remain strong. Zinc assets from Anglo American produced 71,000 tons and 36,000 tons of mined and refined zinc in Q4 FY12, marginally higher on a qoq basis. COP of US$1,240/ton was higher on a qoq basis and also higher than our estimate. The management expects production to decline 10% over the next two years on account of falling grades.
Zinc-lead Global’s quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| Mined metal content (MIC) - BMM & Lisheen (Tons) |
71,000 |
71,000 |
- |
44,000 |
61.4 |
| Refined metal content - Skorpion (Tons) |
36,000 |
34,000 |
5.9 |
36,000 |
- |
| Total |
107,000 |
105,000 |
1.9 |
80,000 |
33.8 |
| Revenue (Rs mn) |
10,070 |
10,300 |
(2.2) |
8,420 |
19.6 |
| EBIDTA (RS mn) |
3,690 |
3,420 |
7.9 |
4,390 |
(15.9) |
| PAT (Rs mn) |
1,740 |
2,010 |
(13.4) |
- |
- |
| Avg LME zinc prices (US$/ton) |
2,037 |
1,912 |
6.5 |
2,416 |
(15.7) |
| CoP (US$/ton) |
1,240 |
1,188 |
4.4 |
1,200 |
3.3 | Source: Company, India Infoline Research
Power division costs decline on the back of higher linkage coal availability
Revenue from the power division jumped 38.9% on a qoq basis and 258% on a yoy basis to Rs8bn. The jump in topline is largely due to commissioning of 2x 600MW power plants in SEL. Power production during the quarter increased to 2.2mn units (including trial production of 209mn units). Power realizations declined marginally qoq due to the reluctance of the power SEBs to buy at higher prices. Power costs under SEL declined from Rs2.5/unit in Q3 FY12 to Rs3.4/unit on the back of higher linkage coal supplies. SEL PLF improved to 65% as the coal availability improved from MCL after it got affected due to flooding in last quarter. SEL commissioned 2x 600MW power plants during the quarter, taking the total power capacity for commercial use to 1,800MW. The fourth unit is expected to be commissioned in Q1 FY13. Work on the Talwandi Sabo power project is progressing as scheduled. The company has already incurred US$1bn of the total capex of US$2bn. It expects to synchronise one unit in Q4 FY13.
Power business quarterly performance
| (Rs m) |
Q4 FY12 |
Q3 FY12 |
% qoq |
Q4 FY11 |
% yoy |
| SEL volumes (mn units) |
1,674 |
1,559 |
7.4 |
563 |
197.3 |
| BALCO volumes (mn units) |
412 |
382 |
7.9 |
432 |
(4.6) |
| WPP (mn units) |
80 |
56 |
42.9 |
45 |
77.8 |
| Total (mn units) |
2,166 |
1,997 |
8.5 |
1,040 |
108.3 |
| Revenue (Rs mn) |
7,970 |
5,740 |
38.9 |
2,230 |
257.4 |
| EBIDTA (RS mn) |
2,390 |
1,470 |
62.6 |
840 |
184.5 |
| PAT (Rs mn) |
54 |
350 |
(84.6) |
500 |
(89.2) |
| Avg Power realisation (Rs/unit) |
3.4 |
3.4 |
(0.3) |
3.1 |
11.1 |
| Avg Power CoP (Rs/unit) |
2.2 |
2.5 |
(12.6) |
3.4 |
(36.3) |
| SEL realisation (Rs/unit) |
3.4 |
3.5 |
(3.1) |
3.1 |
9.7 |
| SEL CoP (Rs/unit) |
2.3 |
2.5 |
(7.7) |
2.3 |
(2.6) | Source: Company, India Infoline Research
Earnings to take centre stage; maintain BUY
Sterlite has significantly underperformed the market and its peers over the last one year due to the various regulatory hurdles the company has faced. We expect higher production costs in aluminum business, coal availability issues and concerns over stabilization of commissioned units in SEL along with regulatory hurdles to weigh negatively on Sterlite’s stock price in the near term. Overall, we continue to see value in Sterlite in spite of several headwinds as we expect earnings momentum to rebound. Also the merged company would be a must own entity as it would provide a large diversified portfolio under one roof. We value the merged entity ‘Sesa Sterlite’ on sum-of-the-parts method. We have used EV/EBIDTA method to value the metal assets, price/book for the power and a holding company discount to Cairn India. We maintain our BUY recommendation on Sterlite with a revised 9-month price target of Rs123.
Financial summary
| Y/e 31 Mar (Rs m) |
FY11 |
FY12E |
FY13E |
FY14E |
| Revenues |
302,481 |
401,169 |
453,507 |
513,617 |
| yoy growth (%) |
23.5 |
32.6 |
13.0 |
13.3 |
| Operating profit |
78,691 |
101,868 |
116,009 |
134,829 |
| OPM (%) |
26.0 |
25.4 |
25.6 |
26.3 |
| Pre-exceptional PAT |
50,994 |
56,059 |
58,977 |
74,203 |
| Reported PAT |
50,425 |
56,059 |
58,977 |
74,203 |
| yoy growth (%) |
34.7 |
11.2 |
5.2 |
25.8 |
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| EPS (Rs) |
15.2 |
16.7 |
17.5 |
22.1 |
| P/E (x) |
6.9 |
6.3 |
6.0 |
4.8 |
| Price/Book (x) |
0.9 |
0.8 |
0.7 |
0.6 |
| EV/EBITDA (x) |
4.7 |
3.9 |
3.1 |
2.4 |
| Debt/Equity (x) |
0.3 |
0.3 |
0.3 |
0.3 |
| RoE (%) |
13.0 |
12.8 |
12.0 |
13.5 |
| RoCE (%) |
15.6 |
17.0 |
16.2 |
16.4 | Source: Company, India Infoline Research
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