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Sterlite: Can it capitalise?

Dec 16, 2000

Sterlite Industries Limited (SIL) has very recently undergone a restructuring exercise. The company, after years of deliberations, has demerged its business operations into copper and telecom. Thereby increasing the focus on its key businesses. Sterlite Optical Technologies Limited (SOTL), representing the telecom business, is the offshoot of the demerger. SIL, meanwhile, is now wholly focused on the copper business with an integrated business model. The copper cathodes, which are derived from refining copper concentrate, are finally converted into continuous cast copper rods. This final product is then used in the manufacturing of jelly filled telecom cables that is a part of SOTL.

The company was amongst the first to set up a copper smelter in the country. Despite the initial hiccups of internal and environmental issues the company managed to successfully commence operations at their 100,000 tonnes per annum (TPA) smelter located at Tuticorin, Tamil Nadu. Fiscal 2000 was their first full year of commercial production and the plant is now believed to be operating above rated capacity.

The copper major now has plans of augmenting its smelter capacity to 150,000 TPA through a two-phase de-bottlenecking exercise. In fact, the company has already completed phase -I of the exercise augmenting capacity to 120,000 TPA. It plans to complete phase - II by the end of the current fiscal.

Sterlite's decision to augment capacity maybe based on the anticipation of a global and domestic shortage in copper supply, perpetuated by a healthy growth in demand. Emerging markets are anticipated to be the key drivers of copper demand in the coming years.

The global demand supply scenario is likely to shift from a supply surplus to an expected deficit of 500,000 tonnes by fiscal 2004. As per the International Copper Study Group (ICSG) the copper deficit for the first nine months of the current fiscal was estimated to be 390,000 tonnes. The scenario in the Indian markets is not likely to be any different with the copper markets reporting a shortage of 110,000 tonnes by fiscal 2004. Further, the domestic markets are expected to clock an 11 percent growth in demand over this period.

Resultant to the copper demand surpassing supply and global inventories depleting, prices of the non-ferrous metal have been firming up since early fiscal 2000 on the London Metal Exchange (LME). With the anticipated shortage in copper supply the prices of the commodity are expected to remain firm, which will further enhance the refiners margins.

Cognisant of the industry characteristics, Sterlite is maintaining strict vigil over its operating expenses to remain amongst the lowest cost producers of copper in the world. Another step in that direction has been the setting up of hedging operations by the company. The hedging mechanism could facilitate better procurement prices and help reduce volatility in purchases and realizations. Thereby smoothening the future cash flows of the company.

Sterlite has also set up a 100,00 TPA phosphoric acid plant based on technology provided by Hydro Agri, United Kingdom. Phosphoric acid is a by-product in the smelting process. The company currently sells the produce to fertilizer units. However, Sterlite will start focusing on non-fertiliser clients' as it is believed that the margins are better in this segment.

TC/RC charges
FY00 0.15
FY01 0.19
FY02 0.20
FY03 0.22
FY04 0.24
* estimated  

Extending its backward integration further, Sterlite's board recently approved the acquisition of two copper mines in Australia. In all cash deal Sterlite will acquire the entire shareholding in these companies for an estimated Rs 2 billion (US$ 43.5 million). Consequently, the company will obtain 50 percent (60,000 tonnes) of its raw material requirement from the mines in Australia. This will help reduce the risk in supply of the raw material; further, it will also bring down copper concentrate procurement costs by an estimated 10 - 15 percent. The acquisition of copper mines is not expected to alter the capital structure of the company as Sterlite has significant cash balances, which cover the acquisition costs.

With the economy poised for growth the copper consumption industries are likely to witness robust growth rates. As penetration of telecom, housing and auto are all abysmally low these industries are expected to report double-digit growth rates in the coming years. Strong demand for the non-ferrous metal will be beneficial for Sterlite's fortunes, however, it will also depend on its ability to maintain healthy treatment charges / refining charges (TC/RC).

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