STERLITE INDUSTRIES

Beta 1.21
Institutional Holding 13.6%
Dividend Yield 1.4%
P/E 14.3
M Cap Rs 19,355 cr.

Sterlite Industries is the most diversified non-ferrous conglomerate in India. Its subsidiary, Hindustan Zinc, which is also a listed entity, is the largest domestic integrated zinc producer. It has an annual zinc production capacity of more than half million tonnes. In fact, it is one of the lowest cost producers of zinc in the world. Besides zinc, the company also has other lines of business, which includes aluminium, copper and energy among others. In aluminium, it is partially integrated and has a production capacity of 0.36 million tonnes per annum. The company has taken a number of steps to increase its aluminium production and make it more integrated. In copper, it makes most of the profit from treatment and refining (TC/RC) margins. This is why copper contributes only 10-15% towards the operating profit even if its contribution towards the top line is more than 50%.

FINANCIALS

The company's net sales more than tripled over last three years to Rs 26,400 crore. The net profit increased by seven times during the same period. Like its other peers, including Hindalco, it has not made a loss during the last fourteen years. Zinc & lead is the most profitable business segment of the company and accounts for around half of the operating profit. Even after the sharp fall in zinc prices (it has more than halved to year-ago levels), the operating margin in zinc & lead business is still a whopping 50-55%. Aluminium is the second-most profitable business and contributes around 20% to the company's net sales. It has an operating margin of around 25% in aluminium business. This would further go up once the company starts getting its raw material (bauxite) from the newly allotted mines. Copper is the least profitable of all the three and has an operating margin of around 15%. The company's overall operating margin stands at around 25%, slightly better than its peers. The company has adopted both inorganic and organic route for its growth. However, the company has not leveraged itself so much for such growth plans. Its consolidated debt-equity ratio stands at a comfortable level of 0.23.

RISK

The company's diversified product portfolio within non-ferrous metals space reduces its business risk. However, it is subject to the overall risk related to commodity cycle. Further, its lower debt-equity ratio and high liquid investments (of around Rs 7,000 crore) relatively insulates it from the current credit crisis.

GROWTH POTENTIAL

The company is planning to increase its zinc and aluminium production capacity significantly. In zinc, its capacity would increase to one million tonne by 2010. In aluminium, smelting capacity in Korba will expand by 0.32 million tonnes, almost doubling the current capacity. Post expansion, the aluminium production capacity at Jharsuguda and Lanjigarh, which falls under Vedanta Alumina (VAL) would also increase by 1.25 million tonnes. Sterlite Industries hold 29.5% in VAL and would benefit to that extent. Its parent company, Vedanta Resources has recently got the clearance for mining the bauxite reserve in Orissa and that would help it lower the cost of aluminium production. Another growth driver for the company would come from commercial power generation business. The first phase of a 2,400-MW power plant is expected to get commissioned by the end of calendar year 2009-10.

To Sum It Up

Sterlite Industries has a diversified portfolio and two of its business segments (zinc and aluminium) are extremely profitable. It has successfully acquired and managed some of the government owned companies. Its lower debt position, higher liquid investment, integrated expansion plan and diversified portfolio makes it an attractive bet for the riskaverse investors.