Sterlite Industries India Ltd Merged Management Discussions

Business Review

Trends in Price Movements of Major Commodities

The Company’s and its subsidiaries’ principal commodities aluminium, copper, zinc and lead are priced with reference to London Metal Exchange (LME) prices. The following section describes the pricing trends of significant commodities in our portfolio for FY 2012-13.

Copper

LME prices decreased from US$ 8,480 per tonne at the beginning of FY 2012-13 to US$ 7,583 per tonne at the year end. However, the average LME copper price for FY 2012-13 was US$ 7,853 per tonne, 7% lower than the average for FY 2011-12. LME prices reached a low point of US$ 7,252 per tonne in June 2012, and a high point of US$ 8,576 per tonne in April 2012.

Aluminium

LME prices decreased from US$ 2,082 per tonne at the beginning of FY 2012-13 to US$ 1,882 per tonne at the year end. However, the average LME aluminium price for FY 2012-13 was US$ 1,974 per tonne, 15% lower than the average for FY 2011-12. LME prices reached a low point of US$ 1,794 per tonne in August 2012, and a high point of US$ 2,177 per tonne in September 2012. However, the price decreased as smelters continued to produce metal despite an uncertain economic environment in Europe and a slowdown in the Chinese economy.

Zinc

LME prices decreased from US$ 1,972 per tonne at the beginning of FY 2012-13 to US$ 1,871 per tonne at the year end. However, the average LME Zinc price for FY 2012-13 was US$ 1,948 per tonne, 7% lower than the average for FY 2011-12. LME prices reached a low point of US$ 1,760 per tonne in August 2012, and a high point of US$ 2,188 per tonne in February 2013. The average price was impacted on account of the Eurozone crisis coupled with a slowdown in the Chinese economy. However, with better than expected growth from China and a general improvement in market sentiments towards the later part of the year, zinc prices improved in the last quarter of the year.

Silver

Average silver LBMA prices during FY 2012-13 decreased from US$ 35.3 per ounce to US$ 30.5 per ounce, a decline of 14%.

The movement of commodity prices in FY 2012-13 is shown in the table below:

	FY 12-13	FY 11-12	% Change
Copper	7,853	8,475	(7.3)
Aluminium	1,974	2,313	(14.7)
Zinc	1,948	2,098	(7.2)
Lead	2,113	2,269	(6.9)
Silver	30.5	35.3	(13.6)

Exchange Rates

We are exposed to exchange rate transaction risk on foreign currency as most of our businesses in India have income and expenditure in Indian rupees. The Rupee-Dollar exchange rate at the beginning of the year was Rs 51.6 per US$ and closed at Rs 54.4 per US$ at the year end. The average exchange rate for the year FY 2012-13 was Rs 54.5 per US$, a 14% increase from Rs 47.9 per US$ in FY 2011-12.

Operational Review

	FY 2012-13	FY 2011-12	% Change
Production (kt)
Total Mined metal	870	831	4.80
Zinc	765	739	3.50
Lead	106	92	14.90
Zinc Refined metal Total	677	759	(10.80)
Integrated	660	753	(12.30)
Custom	17	6	-
Lead Refined metal Total 1	125	99	26.40
Integrated	107	89	19.70
Custom	18	10	-
Saleable silver Total (MT)2	408	242	68.60
Integrated	322	237	36.00
Custom	86	5	-
Average LME zinc cash settlement prices (US$ per tonne)	1,948	2,098	(7.10)
Average LME lead cash settlement prices (US$ per tonne)	2,113	2,269	(6.90)
Average LMBA silver price (US$ per oz)	30.5	35.3	(13.60)
Average Exchange Rate (Rs per US$)	54.5	47.9	13.60
Unit costs
Zinc (US$ per tonne)	998	1,010	(1.20)
Zinc (Other than Royalty) (US$ per tonne)	835	834	-
Zinc (Other than Royalty) (Rs per tonne)	45,461	40,003	13.60
Revenue	12,324	11,132	10.70
EBITDA	6,339	5,976	6.10
EBITDA Margin (%)	51.40%	53.70%

1. Including captive consumption of 7 kt in FY 2012-13 vs. 7 kt in FY 2011-12

2. Including captive consumption of 34 tonnes in FY 2012-13 vs. 35 tonnes in FY 2011-12

3. All % change in production figures have been calculated without rounding the number up to 1,000

Key Achievements

• Highest ever mined zinc and lead production of 870 kt

• Record integrated silver metal production of 322 tonnes, up 36.0% from last year

• Ramp-up of lead and silver production from the Dariba Smelter and Sindesar Khurd Mine

• Maintained lowest quartile cost position Gross addition of 25 mt to R&R

Strategic Priorities

• Realise production capacity

• Develop cost-efficient and reliable underground mines

• Achieve growth to 1.2 mtpa of mined zinc-lead metal

• Continue to focus on adding R&R

Operations

Mined metal production for the year was 870,000 tonnes, 4.8% higher than the previous year, primarily due to increased production from the Rampura Agucha mine.

The integrated production of refined zinc was 660,000 tonnes which was lower than the previous year. The decline in zinc metal production was mainly on account of mine plan where the performance of the second half was much stronger that of the first half, as per the mine plan. Sales of zinc metal-in-concentrate (MIC) were 61,000 tonnes, following surplus concentrate produced in second half. Similarly, integrated production of refined lead increased 19.7% to reach 107,000 tonnes for the financial year.

Integrated production of silver reached a record 322 tonnes for the financial year, up 36.0%. Production of refined lead and silver was boosted significantly by higher contribution from the Sindesar Khurd mine and full year of production at Dariba Lead smelter and the new refineries in Uttarakhand.

Unit Costs

During FY 2012-13, the unit cost of zinc production was higher by 13.6% in INR but lower in USD terms at Rs 45,500 per mt (US$ 835), compared with the previous year. The increase was due to a higher strip ratio at Rampura Agucha and lower acid credits, partially offset by lower power costs. The business remains in the lowest cost quartile compared with other global producers backed by high-quality assets.

Financial Performance

EBITDA for FY 2012-13 increased to Rs 6,339 Crore, compared to Rs 5,976 Crore during FY 2011-12. The positive impact of the higher volumes realised in silver and lead and the depreciation of the Indian rupee was offset by lower metal prices, lower zinc volumes and lower by-product credits. Metal prices were lower during the year: zinc was down by 7.2%, lead reduced by 6.9% and silver fell by 13.6%.

Projects

The Company’s Board and the Board of Directors of Hindustan Zinc Limited (HZL) have approved the next phase of growth to 1.2 mtpa MIC. HZL has been actively conducting exploration activities, which have increased the net R&R across all mines to 348.3 mt of ore as at the end of FY 2012-13.

Based on a long-term evaluation of assets and in consultation with mining experts, Zinc India has finalised plans for the next phase of growth, which will involve the sinking of underground shafts and developing underground mines. The plan includes developing a 3.75 mtpa underground mine at Rampura Agucha and expanding the Sindesar

Khurd mine from 2.0 mtpa to 3.75 mtpa. Other mines will also be expanded: capacity at the Zawar mines will expand from 1.2 mtpa to 5.0 mtpa, the Rajpura Dariba mine from 0.9 mtpa to 1.2 mtpa and the Kayad mine from 0.35 mtpa to 1.0 mtpa. It will also involve the opening up of a small new mine at Bamnia Kalan in the Rajpura Dariba belt.

The growth plan will increase mined metal production capacity to 1.2 mtpa MIC. These mines will be developed using best-in-class technology and equipment, ensuring the highest level of productivity. Although projects will continue until FY 2018-19, we expect to earn benefits from these growth projects from the third year. The annual capital expenditure for these projects will average US$ 250 - US$ 300 million over the next six years, totalling approximately US$ 1.5 billion.

Exploration

Our exploration programme forms an integral element of our growth and expansion strategy.

A high power (50 KW) IP-Resistivity survey, which can scan up to 700 metre depth was deployed this year to detect deeper prospective zones.

During the year, greenfield exploration was carried out over 1,680 sq. km in five reconnaissance permits (RPs) in Rajasthan. The reconnaissance drilling at three prospects in the state has yielded economic to sub-economic intersections of massive sulphide zones over varying widths. Assay results of the holes drilled in one of the RPs in Rajasthan last year has outlined potential economic resources. A total of 91,500 m of core drilling was completed at various exploration sites throughout the mines and tenements. A hole of 1,702 m drilled at Rampura Agucha is the deepest ever at any of India’s base metal exploration sites.

Our exploration success continued during the year and we added 24.6 mt to R&R, prior to the depletion of 8.6 mt. With a total R&R of 348.3 mt containing 35.1 mt of zinc lead and 910 moz of silver as at March 31, 2013, we have maintained our leadership position in the industry and have over 25 years of remaining mine life. The R&R position has been independently reviewed and certified as per the JORC standard by SRK Consulting (UK) Limited.

We have a strong track record of low-cost exploration and have increased R&R five times, net of depletion, since 2003.

Outlook

Mined metal production in FY 2013-14 is expected to be close to 1 mt, 15% higher than FY 2012-13. We expect commercial production to commence at the Rampura Agucha underground mine and the Kayad mine during the current financial year. Additionally, normal operations at the Zawar mine will also contribute to increased mined metal production. We also expect to produce around 360 Kgs of integrated saleable silver in FY 2013-14. During the current year, we expect mined metal and refined metal capacities to be nearly balanced.

Zinc International

Production Performance

	FY 2012-13	FY 2011-12	% Change
Production Zinc (kt)
Mined metal content BMM and Lisheen	208	215	-3.20%
Refined metal Skorpion	145	145	-
Production Lead (kt)
Mined metal content	72	84	-13.70%
Zinc (US$ per tonne) CoP with royalty	1,092	1,146	4.7
Revenue	4,331	4,258	1.70%
EBITDA	1,603	1,737	-7.70%
EBITDA Margin	37.00%	40.80%

Key Achievements

• Stable operating and improved cost performance despite fall in grades and volume

• Production volumes in line with mine plan

Strategic Priorities

• Feasibility study of Gamsberg & Swartberg projects underway

• Feasibility study for Refinery Conversion Project being investigated to co-treat sulphide opportunity in Namibia

• Focus on increasing the mine life of all assets though in pit and near pit drilling & exploration continues

Operations

Total production of zinc and lead MIC and zinc refined metal was 426,000 tonnes compared to 444,000 tonnes last year. The current year’s production comprised 280,000 tonnes of zinc and lead MIC at the Lisheen and Black Mountain Mine (BMM), and 145,000 tonnes of refined zinc at the Skorpion mine.

Unit Costs

The unit cost of production reduced in FY 2012-13 to US$ 1,092 per tonne from US$ 1,146 per tonne in FY 2011-12, primarily due to operational efficiencies and favourable currency movements.

Financial Performance

EBITDA for FY 2012-13 was Rs 1,603 Crore and was impacted due to lower zinc and lead prices, and lower volume, mainly from the Lisheen mine but was partially offset by lower cost of production (CoP).

Outlook

In FY 2013-14, production at Zinc International is expected to be impacted by a fall in grade and progressive reduction in production at the Lisheen mine. These are expected to lead to lower production volumes at around 390-400 kt. During the current year we plan to complete the feasibility study for Gamsberg & Swartberg and the Refinery Co-treatment projects.

Copper

Copper India

Production Performance

	FY 2012-13	FY 2011-12	% Change
Production (kt)
Australia - Mined metal content	26	23	15.20
India Cathode	353	326	8.40
Average LME cash settlement prices (US$ per tonne)	7,853	8,475	(7.30)
Unit conversion costs (CoP) (US cents per lb)	8.7	0.0	-
Exchange Rate (INR per US$)	54.5	47.9	13.60
Realised TC-RCs (US cents per lb)	12.8	14.5	(11.70)
Revenue	21,742	20,166	7.80
EBITDA	1,217	1,529	(20.40)
EBITDA Margin	5.60%	7.60%	-

Key Achievements

• Record copper cathode production

• Strong operating performance at Copper India

• Commissioned first 80 MW unit of the 160 MW captive power plant at Tuticorin in Q3 FY 2012-13

• Increased mined metal volumes in Australian copper mine

• R&R increased to 8.9 mt at the Australian mine with mine life of around four years

Strategic Priorities

• To resume Indian operations [currently under closure as per the order of the Tamil Nadu Pollution Control Board (TNPCB)]

• Sustain efficiency of cost leadership at copper smelting operations

• Commissioning of second unit captive power plant

Operations

Production of cathodes at our Copper India business was 353,000 tonnes in FY 2012-13, up 8.4% year on year. Mined metal production in our Australian mines also improved at 26,000 tonnes in FY 2012-13.

Unit Costs

CoP increased from 0.0 US cents per lb to 8.7 US cents per lb, mainly due to significantly lower byproduct credits and higher power and petroleum costs.

In FY 2012-13, the unit cost of production at our Australian operations, including treatment and refining charges (TC/RCs) and freight, was 220 US cents per lb down from 233 US cents per /lb in FY 2011-12.

Financial Performance

EBITDA for FY 2012-13 was Rs 1,217 Crore compared with Rs 1,529 Crore in the previous year. This decrease was primarily due to an increase in CoP, partiallyoffset by positive currency movement resulting from the depreciation of the Indian rupee and EBITDA from the power plant. TC/RCs received in FY 2012-13 were also lower by 11.7% at 12.8 US cents per/lb compared with 14.5 US cents/ per lb in FY 2011-12.

Tuticorin Copper Smelter

Following a few public complaints against emissions, the TNPCB ordered closure of the Tuticorin Copper Smelter on March 29, 2013. The Company’s appeal against the TNPCB order has been admitted by the National Green Tribunal (NGT). An expert committee constituted by the NGT has submitted its report and the matter is now being heard by the NGT.

Additionally, on April 2, 2013, the Honourable Supreme Court upheld our appeal filed in 2010 against the Madras High Court order for smelter closure and ordered us to deposit Rs 100 Crore (US$ 18 million) with the District Collector, Tuticorin, which will be used to improve the environment, including soil and water, in the vicinity of the plant. Over the two year court process, regulatory bodies have inspected and confirmed that the plant meets the required standards. Some recommendations for improvements had been proposed during inspection, all of which have been implemented.

Projects

160 MW CAPTIVE POWER PLANT

The first 80 MW unit of the captive power plant was commissioned during the year and is operating near to full capacity. The second unit is awaiting consent to operate from TNPCB.

400 KTPA COPPER SMELTER

The project is on hold and awaiting consent from TNPCB to resume operations.

Outlook

Due to the bi-annual shutdown planned in FY 2013-14 and the recent closure, we anticipate that production will be lower compared to FY 2012-13. This will also depend on the commencement of operations after the current suspension. Sale of surplus power will augment the financial performance.

Aluminium

BALCO

Production Performance

	FY 2012-13	FY 2011-12	% Change
Production (kt)
Aluminium	247	246	0.40
Average LME cash settlement price (US$ per tonne)	1,974	2,313	14.70
Exchange Rate (INR per US$)	54.5	47.9	13.60
BALCO CoP (US$ per tonne)	1,951	1,997	(2.30)
BALCO CoP (Rs per tonne)	106,236	95,747	11.00
Revenue	3,426	3,112	10.10
EBITDA	301	406	(25.9)
EBITDA Margin	8.80%	13.00%

Key Achievements

• BALCO smelter operated above rated capacity

• Considerable improvement in operational efficiencies

• Maintained second quartile cost position

Strategic Priorities

• Expedite development of captive coal block at BALCO

• Complete ongoing expansion project

Operations

Production of aluminium in FY 2012-13 was 247,000 tonnes in line with the previous year. Operations at the Korba smelter were stable and it continued to operate at its rated capacity.

CoP Performance

Operating costs at the Korba smelter for FY 2012-13 was higher by 11.0% in INR and lower in USD term at Rs 106,236 (US$1,951)/tonne primarily due to higher coal costs on account of coal tapering from May 2012 and higher alumina prices due to the depreciation of rupee during the year.

Financial Performance

EBITDA for FY 2012-13 was Rs 301 Crore, a decrease of 25.9%, compared to Rs 406 Crore in FY 2011-12. EBITDA decreased due to higher CoP and lower metal prices which dropped significantly, i.e. by 14.7%. However, decrease in EBITDA was partially offset by higher sales realisation due to depreciation of the Indian Rupee and higher metal premiums. We witnessed a substantial rise in aluminium premiums year on year following the shortage of primary metal in the physical market due to capacity cutbacks. Net sales realisation over LME was approximately US$ 480 per tonne during FY 2012-13 which was US$ 180 per tonne higher compared to FY 2011-12.

Projects

At the 325 KTPA Korba-III aluminium smelter, mechanical and electrical completion and pre-commissioning of the first phase of 84 pots out of a total 336 pots have been completed. Further work is in progress, and we plan to tap metal in the second quarter of fiscal 2014. The smelter plans to initially draw power from the existing 810 MW power plants at BALCO. The 1,200 MW captive power plant is awaiting final stage regulatory approvals.

Having obtained the Stage-II forest clearance for the 211 mt coal block at BALCO, the process for forest land has been initiated by the State Government. We are in the process of signing the mining lease agreement.

Outlook

We expect our existing facilities will continue to operate at close to their rated capacities in the coming year. The resultant increased volumes, combined with operational efficiencies and expected higher proportion of value-added products should provide improved returns.

Vedanta Aluminium Limited (vAL) (Associate of the Company)

Production Performance

	FY 2012-13	FY 2011-12	% Change
Production (kt)
Alumina Lanjigarh	527	928	(43.2)
Aluminium Jharsuguda	527	430	22.6
Average LME cash settlement price (US$ per tonne)	1,974	2,313	14.7
Exchange Rate (INR per US$)	54.5	47.9	13.6
Jharsuguda CoP (US$ per tonne)	1,869	2,188	(14.6)
Jharsuguda CoP (Rs per tonne)	101,779	104,892	(3.0)
Revenue	7,037	5,834	20.6
EBITDA	971	563	72.5
EBITDA Margin	13.8%	9.7%

Key Achievements

• Record Aluminium production of 527 kt

• Jharsuguda smelter operated above rated capacity

• Considerable improvement in operational efficiencies

• Maintained second quartile cost position

• 29.3% increase in value added product volumes from 165 kt to 214 kt

Strategic Priorities

• Secure captive bauxite mine and realise true cost efficiency potential

• Start-up of Lanjigarh 1.0 mtpa refinery

• Complete ongoing expansion project

Operations

Production of aluminium in FY 2012-13 was 527,000 tonnes, an increase of 22.6% compared to last year. The Jharsuguda-I smelter operated above the rated capacity, with significant improvement in specific power consumption, throughput and other operational parameters.

Alumina production at Lanjigarh remains temporarily suspended since December 5, 2012, due to inadequate availability of bauxite. We remain engaged with the Odisha State authorities for allocation of bauxite as per our existing memorandum of understanding (MoU) with the Odisha State Government. A ministerial level committee is looking into the issue of bauxite supply and is expected to submit its report shortly.

The Ministry of Environment and Forests (MOEF) had earlier rejected the application for the final stage forest clearance for the Niyamgiri mining project of Orissa Mining Corporation (OMC) which is one of the sources of supply of bauxite to the alumina refinery of VAL. Following the petition filed by OMC challenging the MOEF decision, the Honourable Supreme Court, through its order dated April 18, 2013, has directed the State Government of Odisha to place unresolved issues and claims of the local communities under the Forest Right Act before the Gram Sabha, the council representing the local community. On the conclusion of the proceedings of the Gram Sabha, the MOEF will then take a final decision on granting the Stage II forest clearance for the Niyamgiri mining project within two months.

CoP Performance

CoP of hot metal at Jharsuguda was lower compared to the previous year, reflecting improved operating performance, a decrease in prices of e-auction coal partly offset by increased carbon and alumina cost. Even without captive bauxite and the reliance on imported alumina, our aluminium operations were ranked in the second quartile of the global cost curve.

Financial Performance

EBITDA for FY 2012-13 was Rs 971 Crore improved by 72.5%, compared to Rs 563 Crore in FY 2011-12. EBITDA increased due to higher volume and metal premiums with improved operational and cost efficiencies offset by lower metal prices which dropped significantly 14.7%. The premium on aluminium ingots has increased significantly from US$ 150 per tonne to US$ 175 per tonne.

Projects

We continue to evaluate the potential start-up date of the 1.25 mtpa Jharsuguda-II Aluminium smelter.

Outlook

We expect our existing facilities will continue to operate at close to their rated capacities in the coming year. The resultant increased volumes, combined with operational efficiencies and expected higher proportion of value-added by products should provide improved returns.

Power

Production Performance

	FY 2012-13	FY 2011-12	% Change
Power Sales (MU)	9,282	7,579	22.5
SEL 2,400 MW Jharsuguda	7,530	5,638	33.6
BALCO 270 MW Power Sales	1,241	1,605	(22.7)
HZL wind Power	511	336	52.1
Average Sales realisation (Rs /unit)	3.34	3.39	(1.5)
Average Cost of production (Rs /unit)	2.06	2.40	(14.2)
SEL CoP (Rs /unit)	2.08	2.62	(20.6)
SEL realization (Rs / Unit)	3.33	3.42	(2.6)
Revenue	3,114	2,504	24.4
EBITDA	1,115	714	56.2
EBITDA Margin	35.8%	28.5%

Key Achievements

• Record sales of 9,282 million units, up 22.5% from the previous year

• Strong cost performance, lower cost of generation

Strategic Priorities

• Enhance power sales and transmission strategy

• Stabilisation of the fourth unit at Sterlite

• Energy Limited and improved Plant Load Factor Improve coal sourcing

• Complete 1,980 MW Talwandi Sabo power project

Operations

Power sales were 9,282 million units during FY 2012-13, compared to 7,579 million units during the previous year. This increase was primarily due to higher power generation and sales from three units of the Jharsuguda 2,400 MW power plant. The PLF of the three operating units in the year was 47%. Overall the station delivered an effective PLF of 40% taking into account all four units. The fourth unit was commissioned on March 31, 2013. The PLF achieved was lower than capacity as distribution limits were imposed after grid failures in August 2012 in addition to power transmission bottlenecks.

The PLF trend accelerated in Q4 FY 2012-13 and was at 58% for three units and 44% for the station as a whole. The increase in PLF was driven by the commissioning of the new shared 1,000 MW Raipur-Wardha transmission line in January 2013, and the partial easing of transmission restrictions.

Unit Costs

Average power generation costs in FY 2012-13 were Rs 2.06 per unit compared to Rs 2.40 per unit in FY 2011-12, primarily driven by reduced e-auction coal cost, higher usage of linkage coal and plant stabilisation at SEL. Average power sales prices were lower in FY 2012-13 at Rs 3.34 per unit compared to Rs 3.39 per unit in FY 2011-12.

Financial Performance

EBITDA in FY 2012-13 was Rs 1,115 Crore, higher than Rs 714 Crore delivered in FY 2011-12. EBITDA rose primarily due to higher volumes and lower generation costs, partially offset by a fall in power tariffs.

Projects

TALWANDI SABO IPP

Work at the Talwandi Sabo power project is progressing well and the first unit is expected to be synchronised in Q2 FY 2013-14 and each subsequent unit at four monthly intervals.

Outlook

We expect 60-70% PLF for all four units at Sterlite Energy Limited in the near future with further easing of transmission constraints.

Overall Outlook

As the world economy returns to growth, a number of factors will continue to drive demand for commodities including positive signs from China, reduced inflation in India,risingincome and increased prosperity in developing countries with associated industrialisation and urbanisation trends. With its proximity to emerging markets and strong low-cost assets, the Company is well-placed to take advantage of these opportunities.

Financial Review

Consolidated Financial Review

Table 4 lists the performance of Sterlite as a consolidated entity for the year ended March 31, 2013, compared with the previous year. Further details are given in the balance sheet, profit and loss account and the notes accompanying this annual report.

Table 4: Consolidated Financial Performance of Sterlite

Particulars	FY 2012-13	FY 2011-12
Revenue from Operations	44,922	40,967
Other Income	3,710	3,375
Total Income	48,632	44,342
Consumption of Raw materials including stock adjustment	20,940	18,844
Employees Cost	1,880	1,612
Power & fuel charges	4,420	4,040
Other expenditure	7,453	6,819
Total Expenditure	34,693	31,315
Profit Before Depreciation, Interest and Tax	13,939	13,027
Depreciation	2,032	1,830
Interest & Finance Charges	922	852
Exceptional expenses/(income)	118	473
Tax expenses	1,618	2,111
Profit After	9,249	7,761
Minority Interest	2,529	2,161
Consolidated share in the Profit/(Loss) of Associate	(660)	(772)
Attributable PAT	6,060	4,828
Earnings Per Share (Rs per share)	18.0	14.4

Income

Revenue increased to Rs 44,922 Crore in FY 2012-13 from Rs 40,967 Crore in FY 2011-12, an increase of Rs 3,955 Crore by 9.7%. The revenue increased as a result of volume growth in our Zinc India, Copper India and power businesses, which was partially offset by lower the 13.6% depreciation of the rupee augmented revenues of our businesses located in India. Other income increased to Rs 3,710 Crore from Rs 3,375 Crore , an increase of Rs 335 Core, or 9.9%. The growth in other income was mainly due to increased interest income on bank deposits and gains from mutual fund investments, representing improved yield on investment.

Expenses

The major portion of our raw material costs occurs in the copper business, where copper concentrate is imported. Our fully-owned copper mines (Mt. Lyell in Tasmania, Australia) supply only 8% of our concentrate requirement and the balance is sourced from other mines through a mix of long-term contracts and spot purchases. The ective income tax rate was 14.9%eff price of copper concentrate is linked to prevailing LME prices of refined copper. We also import rock phosphate for conversion into phosphoric acid. Raw materials at Fujairah included copper cathodes purchased at LME prices. The total value of raw material consumed was Rs 20,940 Crore in FY 2012-13, representing 11.1% increase over the previous year.

Personnel expenses increased by 16.6% to Rs 1,880 Crore in FY 2012-13. Other expenses, comprising of power and fuel, stores and spares, repairs, administration, selling and distribution and so on, increased to Rs 11,873 Crore as compared to Rs 10,859 Crore in the previous fiscal year. The rise was mainly on account of an increase in power & fuel charges and mining costs due to increased volumes in our Zinc India, copper and power businesses.

Depreciation

Depreciation increased by Rs 202 Crore to Rs 2,032 Crore in FY 2012-13 compared to Rs 1,830 Crore in the previous year. The depreciation was higher due to the capitalisation of growth projects at Zinc India and Sterlite Energy. commodity prices. During the year,

Interest

Interest costs increased to Rs 922 Crore for FY 2012-13, compared to Rs 852 Crore in the previous year.

Exceptional items

Exceptional items includes Rs 100 Crore recognised during the year towards the compensation ordered by the Supreme Court with respect to the Tuticorin Smelter and Rs 18 Crore incurred under the voluntary retirement scheme at HZL.

Taxes

Tax expense decreased from Rs 2,111 Crore in FY 2011-12 to Rs 1,618 Crore in FY 2012-13. FY Our 2012-13 compared to 21.3% in FY 2011-12. The effective tax rate was lower in FY 2012-13 mainly due to lower tax rate in HZL due to location-based tax incentives, tax incentives related to captive power and wind power and tax-efficient treasury investments.

Profitability

Profit after tax increased to Rs 9,249 Crore in FY 2012-13 compared to Rs 7,761 Crore in the previous year.

Earnings per share

The earnings per share after exceptional items was Rs 18.0 per share for the FY 2012-13 compared to Rs 14.4 per share for the previous year.

Capital structure

Total shareholders’ funds as on March 31, 2013 aggregated Rs 50,955 Crore, of which equity capital was Rs 336 Crore comprising 336,12,07,534 shares of Rs 1 each.

Reserves and surplus

As on March 31, 2013, reserves and surplus of the Company aggregated Rs 50,619 Crore. Free reserves accounted for 62% of the reserves and surplus, and share premium constituted the balance. Reserves and surplus during the year increased by Rs 4,899 Crore, registering a growth of 10.7%.

Short-term and Long-term Borrowings

The Company’s debt as on March 31, 2013, was Rs 19,277 Crore compared to Rs 15,694 Crore for the same date last year. Borrowings increased due to funding expansion projects at BALCO, SEL, TSPL and VGCB.

Net Fixed Assets

The net fixed assets as on March 31, 2013, was Rs 23,139 Crore compared to Rs 21,409 Crore as at March 31, 2012. The increase was primarily due to the capitalisation of the fourth unit of the Jharsuguda power plant and the commencement of operations at VGCB.

The capital work in progress as on March 31, 2013 was Rs 17,032 Crore compared to Rs 12,092 Crore as at March 31, 2012. The increase was due to investments in expansion projects at HZL, BALCO and TSPL.

Balance sheet and Cash flow

We continue to have a strong balance sheet with capital employed at Rs 65,239 Crore and net cash of Rs 5,570 Crore. Net cash comprised of cash and liquid investments of Rs 24,847 Crore offset by a debt of Rs 19,277 Crore as on March 31, 2013.

The Company continued to maintain its long-term rating at AA+/stable from CRISIL.

As at March 31, 2012, we had a multiple of 11.5x EBITDA/gross interest expenses and 3.4x net asset/ debt, which reflects a robust and strong balance sheet.

The cash flow summary for the year is given in Table 5:

Table 5: net cash from/(used in)

	FY 2012-13	FY 2011-12
Operating Activities	6,824	8,400
Investing Activities	(7,452)	(9,522)
Financing Activities	312	662

Cash flows generated from operations have been utilised towards payment of dividend and taxes and partly for expansion activities etc. We have used cash in the investing activities primarily towards purchases of fixed assets and loan to associate company. Net cash of Rs 312 Crore provided by financing activities was mainly on account of drawing of long-term loans for projects. We remain focused on maintaining a strong balance sheet to fund our future growth.

Risks and Risk

Management Practices

The management of risk is critical to the success of any company. The Sterlite Group is exposed to a variety of risks which are inherent in an international mining and resources organisation. The current unstable environment carries with it constantly evolving risks, making it essential for natural resources companies to manage these constantly changing risks, while simultaneously balancing the relative risk/reward equations demanded by its stakeholders. Effective management of risk supports the delivery of our objectives and achievement of sustainable growth. Hence, maintaining a robust risk management system is critical to allow us to pursue growth opportunities, increase shareholder value and also manage a variety of risks which could have financial, operational or reputational impact.

These risks are the result of both the business environment within which we operate and other factors over which we have little or no control. These risks can be categorised as operational, financial, environmental, health and safety, political, market-related and strategic risks. We have well documented and practised risk management policies that act as an effective tool in minimising the various risks that our businesses are exposed to during the course of their day-today operations as well as in their strategic actions.

Understanding the risks may affect us and developing an adequate risk management system is an imperative and allows us to pursue growth opportunities, increase shareholder value and mitigate risks which could have financial, operational or reputational impact. We are committed to a robust system of risk identification, backed by a robust risk management framework.

Our risk management framework acts as an effective tool in mitigating the various risks which our businesses are exposed to in the course of their operations as well as in their strategic actions. We have a continuous process to identify, analyse, evaluate and respond to possible future events or risks that might impact the achievement of objectives.

We have a multi-layered risk management framework aimed at various risks which our businesses are exposed to in the course of their operations as well as in their strategic actions. The Board of Directors has the ultimate responsibility for management of risks and for ensuring the effectiveness of internal control systems. The Audit Committee aids the Board in this process by identification and assessment of any changes in risk exposure, review of risk control measures in place and by approval of remedial actions, where appropriate.

A consistently applied methodology using the Turnbull matrix is used to identify risk at the individual company level covering operations and projects. Risks are identified through a formal risk management programme with the active involvement of business managers and senior management personnel both at the subsidiary and corporate levels. Each significant risk has an ‘owner’ within the Group at a senior level, and the impact to the Group if a risk materialises, and its likelihood of occurrence, is regularly reviewed. A risk register and matrix is maintained, which is regularly updated in consultation with business managers. The risk management process is coordinated by our management assurance function and is regularly reviewed by our Audit Committee. Key business decisions are discussed at the monthly meetings of the Management Committee. Senior managers address risk management issues when presenting initiatives to the Management Committee. The overall internal control environment and risk management programme are reviewed by our Audit Committee on behalf of the Board.

We have a strong internal control culture throughout the Group. The strength of a business’ internal control environment forms a component of senior managers’ performance appraisals. The audit process and audit plan cover the key risks identified through the ‘risk management programme’ and the existence and effectiveness of control measures against each risks are verified. Control measures stated in the risk matrix are also verified by the business managers.

External Risks

COMMODITY PRICES

Prices of commodities we produce have historically been volatile, and any prolonged downward pressure or volatility in metal prices could materially affect our Group’s earnings and cash flows. Although our diversified presence across commodities partially hedges us against the impact of price volatility in commodities, any persistent economic downturn would impact our financial position.

We follow a policy to sell our products at prevailing market prices and not to enter into price hedging arrangements other than for businesses which are on tolling basis where back-to-back hedging is used to mitigate pricing risks. In exceptional circumstances we may enter into strategic commodity hedging but only with prior Management approval.

REGULATORY, ECONOMIC, SOCIAL AND POLITICAL UNCERTAINTY

Our mining and smelting operations are located in India, Namibia, South Africa, Ireland, U.A.E. and Australia. Our holding and investment companies are located in jurisdictions including the United Kingdom, Mauritius and Netherlands. The political, legal, fiscal and other regulatory regimes in the countries we operate in may result in higher operating costs or restrictions such as the imposition or increase in royalties or taxation rates, export duty, impact on mining rights/ban and change in legislation pertaining to repatriation of money.

Changes to government policies such as changes in royalty rates, cutback in import tariffs in India, reduction in assistance given by the Government of India for exports and the curtailment of income tax benefits available to some of our operations in India and Namibia are some of the examples of risks under this category. We may also be affected by the political acts of governments in these countries over which we have no control. Any change in government policies and legislation, including resource nationalisation, availability of foreign exchange, may also affect our business and profitability, including any retrospective changes in government policy and legislation.

The majority of our Group revenues and profits are derived from commodities sold to customers in India. Any downturn in the overall health of the Indian economy or any political or regional instability may impact revenue margins, including any impact arising as a result import tariffs prevailing in India.

Operation and expansion of various assets within the Group remain subject to legal proceedings, most notably the expansion of the Tuticorin smelter in Sterlite and the 1,200 MW power project at BALCO.

Although we are hopeful that the necessary approvals will be obtained and the projects will commence within the foreseeable future, emergence of any such issues in future are not only difficult to predict, but are also beyond our control.

The Company monitors regulatory and political developments on a continuous basis.

Financial Risks

CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL RESULTS

Our assets, earnings and cash flows are influenced by a variety of currencies due to the diversity of the countries in which we operate. Fluctuations in the exchange rates of those currencies may have a significant impact on our financial results.

Although the majority of the Group’s revenue is tied to commodity prices that are typically priced by reference to the US dollar, a significant part of its expenses are incurred and paid in local currency such as the Indian rupee and, to a lesser extent, the Australian dollar, the Namibian dollar, the South African rand and the Euro. Any material fluctuations of these currencies against the US dollar could result in lower profitability or in higher cash outflows towards debt obligations.

During FY 2012-13 there was volatility in the Indian currency against the US Dollars and the Indian Rupee depreciated by 6.3%, which increased our mark-to-market losses on dollar loans. Our attributable profit is also impacted significantly where our companies which have higher attributable shares.

The Group seeks to mitigate the impact of short-term movements in currency on its businesses by hedging its short-term exposures progressively based on their maturity. However, large or prolonged movements in exchange rates may have a material adverse effect on the Group’s businesses, operating results, financial condition and/or prospects.

LIQUIDITY RISKS IN TERMS OF BEING ABLE TO FUND OPERATIONS AND GROWTH

Our Group is in the final stage of a major capital expenditure project to increase Group capacity and generate more cash flow from operations. The Group needs to fund its on-going growth capex and any near-term operational/exploration capex programmes and meet debt maturity requirements. While the Group’s balance sheet and business model is adequate to meet its funding requirements and supports its ability to raise adequate financing but a sustained adverse economic downturn and/or suspension of its operation in any business, effecting revenue and free cash flow generation, may cause some stress on the Company’s financing and covenant compliance.

The Group generates sufficient cash flows from its current operations which together with the available cash and cash equivalents and liquid financial asset investments provide liquidity both in the short-term as well as in the long-term. However any constraints around up-streaming of funds from the subsidiaries to the Group may affect the liquidity position of the Group.

The Group has a strong balance sheet that gives sufficient headroom to raise further debt, should the need arise. The Company’s current ratings from CRISIL is AA+, same as the previous year. This rating supports the necessary financial leverage and access to various funding sources of debt or hybrid debt instruments at competitive terms. The Company generally maintains a healthy net debt-equity ratio and retains flexibility in the financing structure to alter the ratio when the need arises.

Counter-party Risks

We are exposed to counter-party credit risks on our investments and receivables.

We have clearly defined policies to mitigate these risks. Cash and liquid investments are held primarily in debt mutual funds and banks with high credit ratings. Emphasis is given to the security of investments. Limits are defined for exposure to individual counter-parties in the case of mutual fund houses and banks. Most of our surplus cash is invested in banks and mutual funds in India where there is a well-developed financial market. We also review the underlying investment portfolio of mutual fund houses to ensure that indirect exposures or latent exposures are minimised. The investment portfolio is monthly being reviewed by external agency, i.e. CRISIL (a subsidiary of Standard & Poor).

A large majority of receivables due from third parties are secured either as advance receipt of money or by use of trade financial instruments such as letters of credit. Moreover, given the diverse nature of our businesses, trade receivables are spread over a number of customers with no significant concentration of credit risk. Our history of the collection of trade receivables shows a negligible provision for bad and doubtful debts. Therefore we do not expect any material risk on account of non-performance by any of the counter-parties.

Strategic Risks

DELAYS IN EXPANSION AND NEW PROJECTS

The Group has a number of significant expansion plans for its existing operations and planned greenfield projects, which involve significant capital expenditure. The timing, implementation and cost of these expansion projects are subject to a number of risks, including the failure to obtain necessary licenses, permits, consents and approvals, funding for the projects. Any failure to obtain the requisite regulatory approvals may delay or prevent the Group from commencing commercial operations at certain of these projects.

For instance VAL, the associate of the Company does not currently have all of the required environmental approvals for the proposed expansion at the alumina refinery at Lanjigarh and related mining operations in Niyamgiri Hills Odisha. In order to satisfy our short-term bauxite requirements, we are communicating with the Odisha Government and other sources regarding the allocation of new mining leases. Sourcing of bauxite from mines in neighbouring states is also being pursued.

Any delay in completing planned expansions, revocation of existing clearances, failure to obtain or renew regulatory approvals, non-compliance with applicable regulations or conditions stipulated in the approvals obtained, suspension of current projects or cost overruns or operational difficulties once the projects are commissioned may have a material adverse effect on the Group’s businesses, operating results, financial condition and/or prospects. Any delay in completing planned expansion could have a material adverse effect on our credit rating, which may increase our borrowing costs.

HEALTH, SAFETY, ENVIRONMENTAL RISKS

Our mining, smelting and power generation operations are subject to extensive health, safety and environmental (HSE) regulations and legislations. As regulatory standards and expectations are constantly developing, we may be exposed to increased litigation, compliance costs and unforeseen environmental rehabilitation expenses.

Potential health, environmental and community events that may have a material adverse impact on our operations include rock fall incidents in underground mining operations, explosions or gas leaks, uncontrolled tailings breaches, escape of polluting substances, uncontrolled releases of hydrocarbons, human rights breaches and community protests or civil unrest. The Company has appropriate policy and standards in place to mitigate and minimise such occurrences backed by senior operating management’s focus on managing the causes of such incidents, reviews and taking the necessary corrective steps.

Longer-term occupational health issues may arise due to unanticipated harmful workplace exposures or prolonged harmful exposures to employees or site contractors. These effects may create potential occupational hazards and its consequences thereon. The Company an appropriate policy in place for such matters supported by structured processes, controls and technology. Our operations ensure the issue of operational health and consequential potential risk/obligations are carefully handled. Depending on the nature of the exposure and surrounding risk, our operations have different levels of processes, controls and monitoring mechanisms.

The Company has recently implemented a fresh set of policies and standards to align its sustainability framework with international best practices. The Company and its subsidiaries management structure and processes support the sustainability agenda.

EMPLOYEE RISKS

The Group’s efforts to continue its growth and efficient operations will place significant demands on its management resources. The Group’s ability to sustain and grow its existing businesses and integrate new businesses will depend on its ability to ensure the requisite pool of management resources and on its ability to attract, train and retain personnel with the skills that enable it to keep pace with growing demands and evolving industry needs.

The Group is, in particular, dependent to a large degree on the continued service and performance of the executive management team of Sterlite and other key team members in the Group’s business units. These key personnel possess technical and business capabilities that are difficult to replace. Any significant loss or diminution in the collective pool of Sterlite’s executive management or other key team members could have a material adverse effect on its businesses, operating results and future prospects.

The Company has appropriate human resources policies and HR practices in place to mitigate and minimise such occurrences backed by senior management focus and commitment for taking corrective steps wherever required.

Through a combination of management tools such as appropriate compensation policies and practices, differentiating performance through transparent process, rewarding and recognising the extraordinary performance, adequate career opportunities within the Group, and job rotation. Through its policies, the Company ensures it can attract and retain the right talent while aligning the individual and the business goals of the Company.

Operational Risks

DISCOVERY RISKS

The increased production rates from our growth-oriented operations places demand on exploration and prospecting initiatives to replace reserve and resources at a pace faster than depletion.

Actual reserves, resources or mineral potential may not conform to the geological, metallurgical or other expectations and the volume and grade of ore. As our revenues and profits are related to minerals and resource operations, our results and financial outcomes are directly linked to our ability to replace existing reserves and the success of our exploration.

A failure in our ability to discover new reserves, enhance existing reserves or develop new operations in sufficient quantities to maintain or grow the current level of our reserves could negatively affect our prospects. There are numerous uncertainties inherent in estimating ore and oil and gas reserves, geological, technical and economic assumptions that are valid at the time of estimation may change significantly when new information becomes available. The uncertain global financial outlook may affect economic assumptions related to reserve recovery and require reserve restatements which could negatively affect our results and prospects.

Our experience in monitoring and measuring reserve and resources with the support of a dedicated professional team and continued focus on exploration both brownfield and greenfield, over the years has resulted in the Company adding more reserves and resources over and above depletion.

FAILURE TO MEET PRODUCTION AND COSTS TARGETS

Our operations are subject to conditions and events beyond our control that could, among other matters, increase our mining, transportation or production costs, disrupt or halt operations at our mines, smelters and power plants and production facilities for varying lengths of time or even permanently. These conditions and events include disruptions in mining and production due to equipment failures, unexpected maintenance problems and other interruptions, non-availability of raw materials of appropriate quantity and quality for our energy requirements, disruptions to or increased cost of transport services or strikes and industrial actions or disputes.

It is our policy to realise market prices for our commodities and the profitability of our operations is dependent on our ability to produce metals at a low cost which in turn is a factor of our commercial and operational efficiencies and productivity. The prices of many of our input materials are influenced by a variety of factors including demand and supply as well as inflation. An increase in the cost of such input materials would adversely impact our competitiveness.

While few of these risks can be beyond our control, we have adequate and competent experience in these areas and have consistently demonstrated our ability to manage these problems proactively.

Internal Control Systems and their adequacy

Sterlite is committed to maintaining high standards of internal control and risk management to provide the appropriate assurances to all stakeholders. The Company believes it has a proper and adequate system of internal controls commensurate with its size and business operations at its plants and at the corporate headquarters.

The strength of a business’s internal control environment also forms a component of senior managers’ performance appraisals. The Company already has implemented effective internal control over financial reporting based on the criteria established in Internal Control-Integrated Framework issued by COSO.

We have appointed an internationally reputed chartered accountants’ firm to conduct the internal audit of the Company at all its locations. The scope and direction of the annual audit programme is guided by the Group’s Management Assurance Services (MAS), which, in turn, operates under the overall guidance of Sterlite’s Audit Committee.

The objective of the internal audit process is not only to spot transactional errors but also to identify systemic risks, based on the risk profile analysis conducted by the MAS and the auditors. Internal auditors regularly visit our operations at various locations to ensure that transactional and process issues are addressed while conducting audit. Every quarter, the Audit Committee is briefed about the internal control findings, along with the remedial actions that have been suggested or have been already implemented.

Independence of the audit and compliance function is ensured by direct reporting to the Audit Committee of the Board. Details on the composition and functions of the Audit Committee can be found in the chapter on Corporate Governance of the Annual Report.

Critical accounting judgements and estimation uncertainty

In the course of applying accounting policies outlined in the Notes to the Financial Statements, management necessarily makes estimations and assumptions that may have an impact on the financial statements.