Sesa Sterlite Ltd (Q4 FY14)

India Infoline News Service | Mumbai |

The company managed to revive its aluminium division led by a decline in Cost of Production (CoP) at Jharsuguda and higher product premiums.

CMP Rs190, Target Rs207, Upside 8.9% 
  • Strong performance from aluminium and copper division led to an outperformance in topline

  • Aluminium business operating profit of Rs5.3bn was higher than our estimate of Rs4.3bn on the back of strong product premiums and decline in costs at Jharsuguda

  • Lower mined metal in Australia offset the strong performance of the domestic copper smelting business

  • Power production at SEL remained subdued due to lack of evacuation capacity and lower power prices. Power division EBIT impacted by a one-off provision of Rs2.2bn

  • Domestic zinc business operating performance was below par due to lower mined metal output

  • International zinc business performance improved on the back of higher production from the Skorpion mine. This impact was marginally offset by lower mined output at Lisheen and BMM

  • The company has managed to reduce its gross debt by Rs34bn to Rs805.6bn. Net debt stood at Rs297bn, lower by 42bn qoq.

  • The company plans to commission the Jharsuguda II smelter in H2 FY15 on the back of 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

  • Concerns over availability of coal and bauxite linger; Maintain Market Performer rating with a price target of Rs207

Result table
(Rs mn) Q4 FY14 Q3 FY14 % qoq Q4 FY13 % yoy
Net sales 208,944 195,230 7.0 2,921 -
Raw material costs (78,354) (67,059) 16.8 (954) -
Personnel costs (6,499) (7,969) (18.4) (599) -
Other overheads (56,448) (55,300) 2.1 (1,975) -
Operating profit 67,642 64,903 4.2 (607) -
OPM (%) 32.4 33.2 -87 bps (20.8) -
Depreciation (19,932) (20,041) (0.5) (984) -
Interest (15,367) (15,298) 0.5 (1,731) -
Other income 7,637 3,899 95.9 91 -
PBT 39,979 33,462 19.5 (3,230) -
Tax (3,278) 1,385 (336.6) 895 -
Effective tax rate (%) 8.2 (4.1) 27.7
Other prov / minority etc (18,514) (16,983) 9 5,127 -
Adjusted PAT 18,187 17,865 1.8 2,792 -
Adj. PAT margin (%) 8.7 9.2 -45 bps 95.6 -
Extra ordinary items (1,971) 818 (341) 183 -
Reported PAT 16,216 18,683 (13.2) 2,975 -
Ann. EPS (Rs) 21.9 25.2 (13.2) 13.7 -
Source: Company, India Infoline Research
 

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

The company managed to revive its aluminium division led by a decline in Cost of Production (CoP) at Jharsuguda and higher product premiums. Product premiums at Jharsuguda jumped to US$443/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 in Q1 FY15 and plans to operate 84 pots in FY15. 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 on the back of 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.


Aluminium business details
(Rs mn) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Alumina production (Tons)   227,000   -  -   181,000   25.4
Jharsuguda Aluminium prod (Tons)   135,000   133,000   1.5   136,000   (0.7)
BALCO Aluminium prod (Tons)   65,000   62,000   4.8   63,000   3.2
Total aluminium prod (Tons)   200,000   195,000   2.6   199,000   0.5
Revenue (Rs mn)   30,220   26,180   15.4   25,940   16.5
EBIDTA (RS mn)   5,290   3,460   52.9   4,300   23.0
Alumina CoP (US$/ton)   357   -  -   352   1.4
Aluminium CoP (US$/ton)   1,602   1,840   (12.9)   1,629   (1.7)
Aluminium Jharsugida CoP (US$/ton)   1,542   1,799   (14.3)   1,591   (3.1)
Aluminium BALCO CoP (US$/ton)   1,728   1,926   (10.3)   1,709   1.1
Source: Company, India Infoline Research

Copper business: Impact of lower output in Australia offset the increase in Tc/Rc margins

Copper business division performance was marginally lower than our estimate due to lower mined metal output from Australia. Mined metal production has been suspended due to a mud rush at one of the stopes in January 2014. Copper cathode volumes remained strong at 98,000 tons during the quarter. Tc/Rc margins continued to improve sequentially increasing from 15c/lb in Q4 FY13 and 16.6c/lb in Q3 FY14 to 18.5c/lb in the quarter. The management expects Tc/Rc margins to stay above 20c/lb in FY15. Volumes in Q1 FY15 would be impacted due to the maintenance shutdown at the Tuticorin smelter for 22 days. The company received the final regulatory approval for the second unit of the 2x80MW power plant in March 2014. It plans to sell power in the external market from the new unit. 


Copper business details
(Rs mn) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Mined Metal Content (Tons)   1,000   7,000   (85.7)    5,000   (80.0)
Cathodes (tons)   98,000   86,000   14.0   99,000   (1.0)
Power (mn units)   144   35     162  
Revenue (Rs mn)   67,180   58,600    14.6   65,990   1.8
EBIDTA (RS mn)   3,560   3,750   (5.1)   3,920   (9.2)
Avg LME copper prices (US$/ton)   7,006   7,947   (11.8)   7,177   (2.4)
Net CoP - Cathode (c/lb)   6.0   10.7   (43.9)   9.6   (37.5)
Tc/Rc (c/lb))   18.5   14.8   25.0   16.6   11.4
Source: Company, India Infoline Research

Iron ore business: Karnataka output at 1.5mn tons

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 during the year. After the approval from the Supreme Court, SSLT sold 0.3mn tons of iron ore inventory in Q4 FY14 though the e-auction route in Goa. But, the sales were not accounted during the quarter since the dispatches did not take place during the quarter. 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 don't expect any contribution from Goa in FY15.


Iron ore division details
(Rs mn) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Iron ore production (mn tons)   1.5   -  -    -  -
Iron ore sales (mn tons)   0.3   -  -   -  -
Pig iron production (Tons)   133,000   104,000   27.9   139,000   (4.3)
Revenue   5,450   2,870   89.9   2,900   87.9
EBIDTA   (820)   (820)   -    (230)   256.5
Source: Company, India Infoline Research

Power business: Lack of evacuation capacity led to lower production in SEL

Power business was impacted by lack of evacuation capacity in the region. Power production at SEL continued to decline during the quarter. Sales were also impacted due to increase in internal consumption of power at BALCO. External sales of power in BALCO remained subdued as it was consumed to power up the new smelting capacity at BALCO. Power prices remained subdued during the quarter at Rs3.3/unit. Operating profit was impacted by a one-off provision of Rs2.2bn the company has taken due to its dispute with the state GRIDCO. After a spike in CoP to Rs2.1/unit at Jharsuguda in Q3 FY14, CoP declined to Rs1.76/unit during the quarter. The company expects evacuation capacity constraints to ease out in H2 FY15 with the commissioning of new transmission lines in the region. It expects PLF at the Jharsuguda unit to increase to 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 to commence trial runs in Q1 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.  


Power division details
(Rs mn) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Production
2400MW Jharsugoda (mn units)   1,701   2,073   (17.9)   1,827   (6.9)
270MW BALCO (mn units)   84   282   (70.2)    75   12.0
274MW HZL Wind (mn units)   76   78   (2.6)   59   28.8
100MW MALCO (mn units)   231   204   13.2   236   (2.1)
Total (mn units)   2,092   2,638   (20.7)   2,196   (4.7)
Revenue   7,330   9,670   (24.2)   7,750   (5.4)
EBIDTA   500   3,520   (85.8)    2,470   (79.8)
Average CoP (Rs/unit)   2.0   1.9   7.9   2.3   (10.1)
Avg Realisation (Rs/unit)   3.3   3.2   4.4   3.4   (1.5)
Jharsuguda CoP (Rs/unit)   1.8   1.8   -    2.1   (15.8)
Jharsuguda realisation (Rs/unit)   3.0   3.1   (3.6)   3.1   (2.9)
Source: Company, India Infoline Research

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

Revenue of Rs35.6bn was inline with our estimate as the impact of lower mined metal output was offset by higher custom smelting and an increase in product premiums. Mined metal output during the quarter declined 23.1% yoy due to slower rampup of underground mining at Rampura Agucha and changes in mining sequence.  Silver production too remained impacted due to lower grade in SK mine ore. Integrated silver production stood at 68,000 tons from 91,000 tons in Q3 FY14. This impact was negated by an increase in product premiums. Product premiums continued to move northwards during the quarter due to the supply tightness in the region. Operational performance was lower than our estimate due to an increase in costs. The increase in costs was offset by higher product premiums for metal sales. Operating profit of Rs17.5bn was 27% lower on a yoy basis due to lower mined metal output, jump in power costs and an increase in diesel costs. Cost of production increased by 6.6% qoq against our expectation of a marginal increase. Cost of production for the quarter stood at Rs55,467/ton against Rs44,900/ton in Q4 FY13 and Rs52,104/ton in Q3 FY14. For the full year FY14, CoP increased by 14% yoy to Rs51,054/ton. The management expects costs in FY15 to remain around FY14 levels. It also expect metal production to be marginally higher on a yoy basis in FY15. 


Domestic zinc division performance
(Rs mn) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Total mine metal (Tons)   200,000   260,000   (23.1)   220,000   (9.1)
Zinc metal refined prod (Tons)   182,000   182,000   -    196,000   (7.1)
Lead metal refined prod (Tons)   38,000   35,000   8.6   27,000   40.7
Silver production (Tons)   91   117   (22.2)   73   24.7
Revenue (Rs mn)   35,590   38,200   (6.8)   33,880   5.0
EBIDTA (RS mn)   17,100   20,980   (18.5)   18,100   (5.5)
Avg LME zinc prices (US$/ton)   2,024   2,051   (1.3)   1,938   4.4
Zinc CoP without Royalty (Rs/ton)   55,500   44,900   23.6   52,000   6.7
Zinc CoP without Royalty (US$/ton)   899   829   8.4   840    7.0
Source: Company, India Infoline Research

International Zinc business: Costs decline with the ramp up in production

In the international zinc division, impact of an improvement in performance at Skorpion was offset by lower mined metal production at BMM and Lisheen. Refined metal output at Skorpion jumped to 33,000 tons from 23,000 tons in Q3 FY14. This was offset by a 19.4% qoq decline in mined metal output at BMM and Lisheen due to lower grades. CoP declined on a qoq basis due to rampup in production at Skorpion. The Lisheen mine is scheduled for closure in 2015. 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) Q4 FY14  Q3 FY14 % yoy Q3 FY14 % qoq
Mined metal content (MIC) - BMM & Lisheen (Tons)   50,000   65,000   (23.1)   62,000   (19.4)
Refined metal content - Skorpion (Tons)   33,000    36,500   (9.6)   23,000   43.5
Total   83,000   101,500   (18.2)   85,000   (2.4)
Revenue (Rs mn)   11,650   11,300   3.1   7,640   52.5
EBIDTA (Rs mn)   4,410   4,340   1.6   1,490   196.0
Avg LME zinc prices (US$/ton)   2,024   2,051   (1.3)   1,938   4.4
CoP (US$/ton) 1,203   1,181    1.9   1,257   (4.3)
Source: Company, India Infoline Research

Segmental results table (consolidated)
Q1 FY14  Q4 FY13 % qoq Q1 FY14  Q4 FY13
Sales (Rs m) Sales Contribution (%)
Zinc& lead India 31,839 30,559 4.2 15.3 15.7
Silver India 3,750 3,318 13.0 1.8 1.7
Zinc-International 11,655 7,644 52.5 5.6 3.9
Oil & Gas 50,490 49,999 1.0 24.3 25.8
Iron ore 97 78 23.4 0.0 0.0
Copper 67,177 65,991 1.8 32.3 34.0
Aluminium 30,220 25,943 16.5 14.5 13.4
Power 7,921 8,311 (4.7) 3.8 4.3
Others 4,698 2,300 104.2 2.3 1.2
Total 207,846 194,143 7.1
EBIT (Rs m) EBIT contribution (%)
Zinc& lead India 12,831 13,367 (4.0) 33.8 39.0
Silver India 2,550 2,934 (13.1) 6.7 8.6
Zinc-International 2,512 (339) (841.7) 6.6 (1.0)
Oil & Gas 25,842 25,140 2.8 68.0 73.3
Iron ore (1,402) (978) 43.4 (3.7) (2.9)
Copper 2,706 2,855 (5.2) 7.1 8.3
Aluminium 2,506 1,485 68.7 6.6 4.3
Power (944) 980 - (2.5) 2.9
Others (8,591) (11,163) (23.0) (22.6) (32.6)
Total 38,010 34,281 10.9
EBIT margins (%) bps qoq
Zinc& lead India 40.3 43.7 (344)
Silver India 68.0 88.4 (2,042)
Zinc-International 21.5 (4.4) 2,598
Oil & Gas 51.2 50.3 90
Iron ore - - -
Copper 4.0 4.3 (30)
Aluminium 8.3 5.7 257
Power (11.9) 11.8 (2,371)
Total 18.3 17.7 63
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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