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Sterlite Ind: Targeting the top

Jul 4, 2002

After a slide in topline growth in the latter half of the previous fiscal, which dipped into negative territory in 1QFY02, Sterlite Industries (India) Ltd. (SIIL) has been prompt in reviving sales performance. Over the past two quarters, turnover has registered impressive growth, especially considering the economic environment. The performance is in line with industry peer, Indo Gulf. SIIL has changed its financial year end to March from June. Therefore, results for the first nine months of FY02, are reflective of full year performance.

(Rs m) 3QFY01 3QFY02 Change FY01 FY02 Change
Sales 6,662 9,236 38.6% 21,665 24,848 14.7%
Other Income 51 64 25.9% 193 134 -30.7%
Expenditure 5,869 8,173 39.3% 19,158 21,900 14.3%
Operating Profit (EBDIT) 793 1,063 34.1% 2,507 2,949 17.6%
Operating Profit Margin (%) 11.9% 11.5%   11.6% 11.9%  
Interest 265 438 65.1% 884 1,148 29.9%
Depreciation 221 268 21.1% 661 718 8.6%
Profit before Tax 358 422 17.9% 1,155 1,217 5.3%
Tax 37 114 212.1% 103 306 198.5%
Profit after Tax/(Loss) 321 308 -4.1% 1,052 911 -13.5%
Net profit margin (%) 4.8% 3.3%   4.9% 3.7%  
No. of Shares (eoy) 53.9 55.6   53.9 55.6  
Diluted Earnings per share* 23.1 22.2   25.3 21.9  
P/E Ratio         6.5  

Having said that, commodity prices including copper, YoY, over the concerned periods has declined, which is primarily a reflection of weaker demand. Industrial activity, both in global and domestic markets, experienced a downturn over Jan '01 to March '02. Although, London Metal Exchange (LME) copper prices improved in the first three months of calendar year 2002, average price for the concerned periods was lower by 13.2% and 18.9% YoY. Average copper price for nine months to March '02 was $1,483/ tonne.

This suggests that growth in sales is likely to have been driven by volumes. The key copper consuming industries are telecom and housing. Jelly filled telecom cables (JFTC) -- copper cables -- are the highest users of the commodity, accounting for an estimated 30% of total copper consumption. Globally, telecom industry is on a downturn and global majors are unlikely to be using copper cables. JFTC is in threat in domestic markets as well due to newer technologies; namely optic fibre cable (OFC). Sterlite Optical Technologies Ltd., offspring of SIIL, reported a 6% decline in JFTC volumes for FY02. Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) are the largest and likely the only consumers of JFTC. These companies are also increasingly shifting to OFC. The housing market is registering robust growth, which is offering some reprieve.

In FY01, SIIL and Indo Gulf had undertaken debottlenecking exercise to augment copper smelting capacity by 50,000 TPA each. In two phases, SIIL had scheduled to complete debottlenecking in January '01. However, much of the augmented capacity is likely to have become operational in the latter half of calendar year 2001. Consequently, the higher capacity could have facilitated volume growth in the last two quarters. The domestic majors are likely to have eaten into market share of imports. Also, we reckon, China could have improved regional dynamics, as the country pushes ahead on infrastructure (telecom & housing). Sale volumes increased 24% to 110,902 tonnes with domestic & export sales growing 27% and 13% respectively. This suggests, surprisingly, that realisations improved in export markets. Domestic realisations were down an estimated 12.3% YoY.

SIIL is in an organic & inorganic expansion drive for the past half a decade. Sterlite took over Madras Aluminium (Malco) in 1995 for a footing in the aluminum business. It integrated forward by acquiring India Foils in FY00 for Rs 550 m. In February '01, the company acquired 51% Government stake in Balco for Rs 5.5 bn. And followed this with acquisition of 26% Government stake in Hindustan Zinc Ltd. (HZL) for Rs 4.5 bn in March '02. As part of rationalisation plans, the company had indicated to exit from India Foils and hive off the aluminium conductor business to a 100% subsidiary. There is no development on this front. Large investments in the past two years and debottlenecking is likely to have put pressure on cash flows. The lower other income and higher interest could be due to liquidation of investments and increased borrowing respectively.

As mentioned earlier demand from JFTC segment is likely to decline going forward. The company is expecting lower offtake of JFTC by BSNL and MTNL in the current fiscal. Consequently, new segments and export markets would need to be identified. Also, existing consuming sectors would need to take up the slack from JFTC. Housing and auto sectors are performing well in FY03. After the initial rise in calendar year 2002, copper prices are trading at $1,600/ tonne. 15-month LME futures are indicating a price of $1,725/ tonne. Much of the optimism is based on revival in the U.S economy beginning 2003.

At Rs 142 the scrip is trading on a multiple of 6.5x FY02 earnings. The scrip has been trading in a band of 4.5x-6.5x.The company is expanding aggressively but the group was the first private sector copper refiner and enjoys expertise in non-ferrous metals. Having said that, recent acquisitions could make bidding for Nalco challenging. The current scheme of arrangement has run into troubled waters with regulators and is pending adjudicature from the Mumbai High Court.

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