Compared to few other leading non-ferorus metal producers the economic downturn seems to have got the better of Sterlite Industries (India) Ltd. The company has posted a de-growth in sales, which is largely due to the sharp drop in copper prices on the London Metal Exchange (LME). Average copper prices dropped by 21% YoY to $1,473.4 / tonne for the quarter ended September '01. The drop is steeper compared to aluminium, which pulled back by 12% YoY over the same period.
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The lower turnover is the result of an estimated 8.8% reduction in realisations combined with an estimated 3.1% rise in volumes. Copper sales are reported to have increased to 33,613 tonnes over the concerned period. In this challenging environment the company has managed to reign in operating expenses. Raw material expenses, which constitute 90% of total expenditure, have decreased marginally. Staff costs are down sharply by 14.2% YoY. This has enabled the company to protect operating margins, which have in fact increased by 50 basis points. However, operating profits have suffered with the slide in sales.
The higher interest and depreciation expense have led to a decline in pre-tax profits. The sharp drop in bottomline is due to increased tax provisioning. Under AS-22, Accounting for Taxes on Income, the company has provided for deferred tax liability leading to the higher provisioning. Aggregate deferred tax liability upto June '01 will be provided at the end of the current financial year.
The smelter debottlenecking was scheduled to have been completed by January '01 enhancing capacity to 150,000 MTPA. Competitor, Indo Gulf Industries, has also augmented capacity to same levels recently. Sterlite has indicated that copper prices are likely to stabilise at current levels due to demand in India and China. The company also believes that higher offtake of jelly filled telecom cables (JFTC) by Bharat Sanchar (BSNL) is likely to keep demand for copper robust. JFTC is the largest consumer of copper in the domestic industry accounting 30% of total consumption. Consequently, a shift from JFTC to optic fibre cable (OFC), if any, could adversely impact the domestic copper market.
As part of rationalisation in the aluminium business the company has decided to exit the downstream aluminium foil segment. Only in FY00, Sterlite had purchased India Foils for an estimated Rs 550 m to establish a foothold in the downstream sector. The acquisition seems to have been inspired after the company took over Madras Aluminium (Malco). In FY01, the company hived off its aluminium conductor business to a 100% subsidiary. This business continues to perform well having grown by 102% YoY in 1QFY02.
At Rs 108 the scrip is trading on a multiple of 6.2x 1QFY02 annualised earnings. Copper prices have weakened over October '01 and are currently quoting at $1,330 / tonne.
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