Sesa Sterlite Ltd (Q1 FY15)

India Infoline News Service | Mumbai |

Copper business performance was quite weaker than our estimate due to lower volumes and costs involved in maintenance shutdown of the plant.

CMP Rs290, Target Rs270, Downside 6.9%
 
  • Topline of Rs171.8bn was lower than expected due to weaker volumes in Zinc and copper business

  • Aluminium business continued to show improvement on a qoq basis on the back of higher product premiums, increase in VAP products volumes and lower e-auction coal prices

  • Copper business performance was impacted by maintenance shutdown and some onetime costs involved for the same. CoP was high due to weak acid realisations

  • Copper mine at Australia remained closed during the quarter and is expected to be operational only after FY16

  • Power production volumes in SEL improved on a qoq basis due to easing of transmission network in the region and higher availability of coal

  • Domestic zinc business operating performance was below par due to lower mined metal output as the company is in a transformation phase

  • International zinc business performance was impacted due to delay in dispatches and increase in costs

  • The company has managed to reduce its gross debt on a qoq basis on the back of reduction in cash levels

  • Concerns over availability of coal and bauxite linger; recommend reduce rating with a revised price target of Rs270

Result table
(Rs mn) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 171,866 3,784 - 208,944 (17.7)
Raw material costs (55,868) (1,397) - (78,354) (28.7)
Personnel costs (6,518) (526) - (6,499) 0.3
Other overheads (52,746) (2,289) - (56,448) (6.6)
Operating profit 56,734 (428) - 67,642 (16.1)
OPM (%) 33.0 (11.3) - 32.4 64 bps
Depreciation (20,644) (391) - (19,932) 3.6
Interest (15,371) (1,481) - (15,367) 0.0
Other income 11,389 58 - 7,637 49.1
PBT 32,108 (2,242) - 39,979 (19.7)
Tax (3,616) 1,123 - (3,278) 10.3
Effective tax rate (%) 11.3 50.1 8.2
Other prov / minority etc (9,876) 6,255 - (18,514) (47)
Adjusted PAT 18,615 5,136 - 18,187 2.4
Adj. PAT margin (%) 10.8 135.7 - 8.7 213 bps
Extra ordinary items (14,860) (992) - (1,971) 654
Reported PAT 3,756 4,143 (9.4) 16,216 (76.8)
Ann. EPS (Rs) 5.1 5.6 (9.4) 74.6 (93.2)
Source: Company, India Infoline Research

Aluminium business: Jump in premiums led to an outperformance in operating profit

The revival in the aluminium business extended during the quarter led by a decline in Cost of Production (CoP) at Jharsuguda and higher product premiums. Product premiums at Jharsuguda jumped to US$450/ton during the quarter due to strong spot premiums in the region and increase in share of Value Added Products (VAP). Alumina production too increased on a qoq basis and managed to meet 49% of total alumina requirement during the quarter. Aluminium production remained steady at 0.2mn tons. BALCO CoP continued to increase on a qoq basis. BALCO has started production at the Korba III smelter during the quarter and has operationalised 74 pots the quarter. The existing power capacity at BALCO can support the operations of these 84 pots. The company plans to produce 190,000 tons of metal from the new plant. It is awaiting approvals to operate the 1,200MW power plant at BALCO and expects to commission the same in Q3 FY15. The company is also planning to commission the Jharsuguda II smelter in the second half of FY15 with power supply from the 2,400MW SEL power plant. Transmission constraints coupled with lower power prices would lead to a diversion of power from IPP to the aluminium smelters. The management feels availability of e-auction coal would be lower in FY15 due to the Government’s focus of supplying coal to power plants through FSA.


Aluminium business details
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Alumina production (Tons)   233,000    -  -   227,000   2.6
Jharsuguda Aluminium prod (Tons)   132,000   134,000   (1.5)   135,000   (2.2)
BALCO Aluminium prod (Tons)   60,000   61,000   (1.6)   65,000   (7.7)
Total aluminium prod (Tons)   203,000   195,000   4.1   200,000   1.5
Revenue (Rs mn)   29,170   23,630   23.4   30,220   (3.5)
EBIDTA (RS mn)   5,300   2,840   86.6   5,290   0.2
Alumina CoP (US$/ton)   365   -  -   357   2.2
Aluminium CoP (US$/ton)   1,699   1,758   (3.4)   1,602   6.1
Aluminium Jharsugida CoP (US$/ton)   1,636   1,675   (2.3)   1,542   6.1
Aluminium BALCO CoP (US$/ton)   1,834   1,934   (5.2)   1,728   6.1
Source: Company, India Infoline Research

Copper business: lower volumes due to maintenance shutdown led to lower operating profit

Copper business performance was quite weaker than our estimate due to lower volumes and costs involved in maintenance shutdown of the plant. Copper volumes for the quarter were lower by 32.7% qoq to 66,000 tons as the plant was under maintenance shutdown for 21 days. Operating profit for the quarter was lower by 74.7% qoq due to lower volumes, maintenance costs and lower by-product realisations. Tc/Rc margins remained strong at 18.8c/lb, marginally higher than 18.5c/lb registered in Q4 FY14. The management had last quarter guided for Tc/Rc margins to be higher than 20c/lb in FY15. However, lower acid realisations led to an increase in the CoP from 6c/lb in Q4 FY14 to 8.9c/lb. The Australian copper mine operations remain suspended since January ’14. Resumption of mine was impacted by a rockfall in June ’14 and hence the resumption would take more time. The company has guided that resumption of operations would be witnessed after FY16 after it is found to be technically and economically feasible.  


Copper business details
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Mined Metal Content (Tons)   -    6,000 -   1,000 -
Cathodes (tons)   66,000   16,000   312.5   98,000   (32.7)
Power (mn units)   136   137   (0.7)   144   (5.6)
Revenue (Rs mn)   48,550   24,650   97.0   67,180   (27.7)
EBIDTA (RS mn)   900   (20) -   3,560   (74.7)
Avg LME copper prices (US$/ton)   6,762   7,192   (6.0)   7,006   (3.5)
Net CoP - Cathode (c/lb)   8.9   13.9   (36.0)   6.0   48.3
Tc/Rc (c/lb))   18.8   13.9   35.3   18.5   1.6
Source: Company, India Infoline Research

Iron ore business: Iron ore output impacted due to lower offtake in e-auctions

Iron ore operations in Karnataka were started on December 28th, 2013 and the company managed to produce 1.5mn tons in FY14. However, it managed to sell only 27,000 tons of iron ore in FY14 and 0.5mn tons in Q1 FY15. Lower offtake from local steel producers citing higher prices led to a decline in iron ore production during the quarter. Iron ore production declined from 1.5mn tons in Q4 FY14 to 0.01mn tons in Q1 FY15. The company has indicated that iron ore demand in the region has picked up after the restriction put on iron ore mining in Odisha. E-auction sales have increased for the company and would be reflected from Q2 FY15. The management maintained its FY15 production guidance of 2.29mn tons. Operations in Goa remained suspended and the company expects the mines to be operational by H2 FY15. However, commencement of mining operations in Goa would take some time as the mining lease for all the mines in Goa have expired in 2007. Consequently, no mining operations can be carried out until renewal/execution of mining lease deeds by the State government. We believe that resumption of mining in Goa would take time and hence we maintain our view of no contribution from Goa in FY15.


Iron ore division details
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Iron ore production (mn tons)   0.01    -  -   2 -
Iron ore sales (mn tons)   0.5   -  -    0.3   85.2
Pig iron production (Tons)   146,000   110,000   32.7   133,000   9.8
Revenue   4,770   3,630   31.4   5,450   (12.5)
EBIDTA   470   (470) -   (820) -
Source: Company, India Infoline Research

Power business: Easing of evacuation capacity constraint led to an increase in production in SEL

SEL’s Power business over the last two quarter has been impacted by lack of evacuation capacity in the region. Power production at SEL continued to decline on a yoy during the quarter. However, on a qoq basis production was higher due to commissioning of a new transmission line. Sales for the second consecutive quarter were also impacted due to increase in internal consumption of power at BALCO. Power prices remained subdued during the quarter at Rs3.2/unit. Production at SEL increased 26.6% qoq to 2.2bn units. Operating profit for the power division jumped on a qoq basis due to a decline in CoP. Higher availability of linkage coal led to a decline in CoP on a qoq basis. On a yoy basis, lower consumption of e-auction and imported coal due to lower PLF led to a sharp decline in CoP by 15%.  The company expects evacuation capacity constraints to ease out further in H2 FY15 with the commissioning of new transmission lines in the region. It expects PLF at the Jharsuguda unit to increase to 55-60% in FY15 on the back of easing transmission lines and increase in demand for power from the new smelters at VAL. SSLT light up the boiler at the first 660MW unit of 1,980MW Talwandi Sabo power plant in Q3 FY13 and expects reliability runs in Q2 FY15. It expects Talwandi Sabo unit to produce ~5,000mn units in FY15 with commissioning of one unit in Q3 FY15 and the other in Q4 FY15.  We believe the management is quite optimistic in its guidance and expect volumes to be quite lower than the management guidance.  


Power division details
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Production
2400MW Jharsugoda (mn units)   2,154   2,604   (17.3)   1,701   26.6
270MW BALCO (mn units)   70   187   (62.6)   84   (16.7)
274MW HZL Wind (mn units)    146   162   (9.9)   76   92.1
100MW MALCO (mn units)   229   224   2.2   231   (0.9)
Total (mn units)   2,599   3,177   (18.2)   2,092   24.2
Revenue   8,720   12,730   (31.5)   7,330   19.0
EBIDTA   3,380   4,410   (23.4)   500   576.0
Average CoP (Rs/unit)   1.9   2.3   (15.0)   2.0   (5.9)
Avg Realisation (Rs/unit)   3.2   3.6   (11.6)   3.3   (3.9)
Jharsuguda CoP (Rs/unit)   1.8   2.2   (20.8)   1.8   (0.6)
Jharsuguda realisation (Rs/unit)   2.9   3.5   (15.9)   3.0   (2.7)
Source: Company, India Infoline Research

Domestic Zinc business: Lower mined metal led to an underperformance in operating profit

Domestic zinc business registered lower than expected topline due to lower mined metal output and maintenance shutdown at one of its smelters. Mined metal output has been declining over the last one year as the company is transforming its operations at its largest mine, Rampura Agucha. Mined metal output for the quarter was at its lowest in the last four years. The company has indicated that output would be lower in H1 FY15 and would be ramped up in H2 FY15 as the output currently has higher percentage of waste. With the operations expected to touch the ore body in H2 FY15, mined metal output would be quite strong. Refined metal output too was quite lower during the quarter due to lower mined metal availability and maintenance shutdown. The impact of lower metal sales on topline was somewhat negated by higher metal prices and strong product premiums. Product premiums continued to gain on a qoq basis as spot market remained tight. Integrated silver production too was quite lower than expected. Operational performance was weaker than expected due to lower mined metal production and also on account of maintenance shutdown of one of its smelters. Operating profit for the quarter was lower than our estimate. Cost of production too increased on a qoq basis due to lower volumes, lower output from its open cast mines and a jump in mining costs due to higher amount of waste. The share of waste of total output was higher as the company is transforming into underground mining and it will take some time to reach to the ore body. CoP increased by 28.4% yoy and 8.3% qoq to Rs60,093/ton in Q1 FY15. Management expects mined metal output to be marginally higher on a yoy basis in FY15 and costs to remain flat.


Domestic zinc division performance
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Total mine metal (Tons)   163,000   238,000   (31.5)   200,000   (18.5)
Zinc metal refined prod (Tons)   141,000   174,000   (19.0)   182,000   (22.5)
Lead metal refined prod (Tons)   31,000   33,000   (6.1)   38,000   (18.4)
Silver production (Tons)   82   96   (14.6)   91   (9.9)
Revenue (Rs mn)   29,040   28,740   1.0   35,590   (18.4)
EBIDTA (RS mn)   12,960   14,400   (10.0)   17,100   (24.2)
Avg LME zinc prices (US$/ton)   2,074   1,876    10.6   2,024   2.5
Zinc CoP without Royalty (Rs/ton)   60,100   46,800   28.4   55,500   8.3
Zinc CoP without Royalty (US$/ton)   1,005   836   20.2    899   11.8
Source: Company, India Infoline Research

International Zinc business: delay in dispatches and higher CoP impact operating profit

In the international zinc division, production was flat on a qoq basis. However, sales volume for the quarter was lower on a qoq basis due to delay in one shipment. Refined metal output at Skorpion jumped was flat at 33,000 tons and was higher by 2% qoq to 51,000 tons in mined metal output at BMM and Lisheen. Grades at the mines continued to remain below average during the quarter. CoP increased on a qoq basis due shutdown of mill for maintenance. The management expects FY15 volumes at Zinc International to remain in line with FY14, with a drop in Lisheen production expected to be compensated by Skorpion and BMM.


International zinc division performance
(Rs mn) Q1 FY15  Q1 FY14 % yoy Q4 FY14 % qoq
Mined metal content (MIC) - BMM & Lisheen (Tons)   51,000   56,000   (8.9)   50,000   2.0
Refined metal content - Skorpion (Tons)   33,000   34,000   (2.9)   33,000   - 
Total   84,000   90,000   (6.7)   83,000   1.2
Revenue (Rs mn)   8,660   9,380   (7.7)    11,650   (25.7)
EBIDTA (Rs mn)   2,320   2,980   (22.1)   4,410   (47.4)
Avg LME zinc prices (US$/ton)   2,074   1,876   10.6   2,024   2.5
CoP (US$/ton) 1,272   1,162   9.5   1,203   5.7
Source: Company, India Infoline Research

Segmental results table (consolidated)
Q1 FY15  Q4 FY13 % qoq Q1 FY15  Q4 FY13
Sales (Rs m) Sales Contribution (%)
Zinc& lead India 25,862 31,839 (18.8) 15.2 15.3
Silver India 3,177 3,750 (15.3) 1.9 1.8
Zinc-International 8,651 11,655 (25.8) 5.1 5.6
Oil & Gas 44,827 50,490 (11.2) 26.3 24.3
Iron ore 853 97 783.9 0.5 0.0
Copper 48,532 67,177 (27.8) 28.5 32.3
Aluminium 26,510 30,220 (12.3) 15.5 14.5
Power 9,829 7,921 24.1 5.8 3.8
Others 2,315 4,698 (50.7) 1.4 2.3
Total 170,555 207,846 (17.9)
EBIT (Rs m) EBIT contribution (%)
Zinc& lead India 9,400 12,831 (26.7) 54.5 33.8
Silver India 1,859 2,550 (27.1) 10.8 6.7
Zinc-International 319 2,512 (87.3) 1.8 6.6
Oil & Gas 19,717 25,842 (23.7) 114.3 68.0
Iron ore (532) (1,402) (62.1) (3.1) (3.7)
Copper 217 2,706 (92.0) 1.3 7.1
Aluminium 2,541 2,506 1.4 14.7 6.6
Power 1,893 (944) - 11.0 (2.5)
Others (18,166) (8,591) 111.5 (105.3) (22.6)
Total 17,248 38,010 (54.6)
EBIT margins (%) bps qoq
Zinc& lead India 36.3 40.3 (395)
Silver India 58.5 68.0 (948)
Zinc-International 3.7 21.5 -
Oil & Gas 44.0 51.2 (720)
Iron ore (62.4) - -
Copper 0.4 4.0 (358)
Aluminium 9.6 8.3 129
Power 19.3 (11.9) 3,118
Total 10.1 18.3 (817)
Source: Company, India Infoline Research

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