Sterlite Industries Ltd. has been able to stem the slide in sales experienced in the first quarter. For the quarter ended December '01, sales have registered a buoyant rise. Improved volume sales have supported YoY growth while realisation are likely to have ruled lower.
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On the London Metal Exchange (LME), copper prices for the December quarter averaged $1,421.1, which was 21.6% lower compared to the corresponding quarter of the previous year. Copper, on the LME, experienced a similar trend in the September quarter. With lower realisations and marginal growth in volumes sales, growth in the first quarter could not be salvage. However, in 2QFY02, the company has reported a healthy 27% growth in volumes, which is supported mainly by better domestic copper sales. Export volumes are likely to have increased but lower realisations in the export market has led to a decline in export sales. China is the wild card, as the country pushes ahead on infrastructure (telecom & housing), the fresh demand seems to be supporting global demand & supply of the base metal.
The higher copper sales, through improved demand, has been possible with the company undertaking de-bottlenecking at its copper smelter last fiscal. The de-bottlenecking, expanding capacity by 50,000 tonnes per annum (TPA), is likely to have been completed towards mid-2001. Reportedly, the smelter with augmented capacity is operating above rated capacity. The power transmission line aluminium conductor business continues to perform well, registering a 61% YoY growth. This does indicate, contrary to popular perception, activity in the power sector, especially in replacing or developing new grid lines.
Similar to the preceding quarter the company has managed to lift operating margins. OPM has increased by 80 and 70 basis points for the quarter and half year ended December '01. Despite difficult operating conditions in 1QFY02, with lower realisations and poor volumes, the company managed to protect margins, which does reflect well on the company. Commodities, as Indian houses are realising, is a cost game and controlling the same is the only likely way to sustain competitive advantage. The improved sales and higher margins has enabled impressive growth in operating profits.
Both, Sterlite Industries and Indo Gulf Industries have augmented smelter capacity to 150,000 TPA each through de-bottlenecking. Domestic production will eat into imports, which are likely to fall significantly. Backed by higher volume sales, Sterlite Industries could continue with its improved sales performance into 3Q & 4Q, benefiting from the de-bottlenecking effect. Also, copper prices have risen from the lows, post September 11, and are trading near $1,500 / tonne on the LME. This is likely to be the price level for fiscal '02. Having said that, intensity of development effort by China could guide copper prices going ahead.
At Rs 123, the scrip trades on a multiple of 4.8x 1HFY02 annualised earnings. The scrip tends to trade in a P/E band of 3x-6x earnings.
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