Stock Review: Sterlite Industry

THE Vedanta group-owned Sterlite Industry's September 2010 quarter numbers were in line with the market expectations. Improved profitability of its zinc and aluminium business compensated for the subdued performance of its core copper business, which contributes more than half of its revenue.

   In the coming quarters, improving margins in zinc and a higher contribution from its power business are expected to be the key growth drivers for the company.
   During the September 2010 quarter, Sterlite's sales remained flat from the year-ago level despite higher international metal prices. This, however, is not a matter of concern since the flattish topline was due to the planned shutdown at its Tuticorin smelter. Notwithstanding the lacklustre topline growth, operating margin expanded by 117 basis points (bps) on account of better volumes and premiums in the company's zinc and aluminium divisions.

   The company's capex projects have started paying back as it achieved its highest-ever zinc and lead production of 204,836 tonnes, up 6% compared with the prior quarter, primarily on account of stabilisation of the new concentrator at Rampura Agucha. Its recently commissioned hydro zinc smelter at Dariba also started operations and produced 39,000 tonnes in this quarter. Sterilte's aluminium and copper businesses are facing headwinds. In the aluminium segment, the company failed to get the government's clearance for Niyamgiri mines. This will impact its aluminium subsidiary Balco since it will no loner get low-cost alumina from its captive mines. Further, it will also impact the ongoing expansion of Vedanta Aluminium (VAL) in which Sterlite has a 30% stake. Sterlite has till date invested over Rs 6,500 crore in VAL and the entire capex is in jeopardy until the matter is resolved. Another concern is the falling treatment and refining charges (TcRc) in its copper business.

   Amidst these negative factors, Sterlite's foray into the power sector is a positive indicator. About 5% of the company's revenue comes from its power business. The number is likely to grow in the coming quarter with commencement of a 600 MW power project in August. Three other units (each of 600 MW) will be commissioned in a year. Its 1,980 MW super critical power project in Punjab is progressing as per schedule. Power generation is a profitable business. Given the increased visibility of its power projects, the company is likely to earn a significant amount of revenue from this segment.