Stock Review: Sterlite Industries

Sterlite Industries completed the acquisition of Namibia's Skorpion Zinc Mine by paying $707 million. Anglo-Zinc assets add 206 million tonnes (mt) to Vedanta's reserves, taking it to 478 mt and consolidating its position as the world's largest integrated zinc-lead producer. Skorpion's reserves and resources (in terms of ore) stand at 8.3 mt, with 11.3 per cent zinc content, according to Edelweiss reports.

The acquisition will strengthen Sterlite's zinc-lead segment, with Skorpion enjoying the advantage of low cash costs. The deal valuation is also low, at EV/Ebitda (enterprise value by earnings before interest, tax, depreciation and amortisation) of only 3.5-4x (assuming flat volumes), according to analysts at Edelweiss.

The only concern is regarding the mine life, which, according to analysts, is six years.

Also, while Skorpion has been acquired by Sterlite, it is not clear whether Sterlite or its subsidiary, Hindustan Zinc, which was to acquire the entire zinc and lead business of Anglo American, will now go ahead and acquire the Lisheen Mine (Ireland) and Black Mountain mines (South Africa). Hence, analysts remain neutral on the transaction as of now.

For Sterlite, revenues from the zinc-lead segment grew 21.4 per cent to `2,146 crore in the September quarter. With ongoing demand and expansions taking the zinc-lead capacity to 1.1 mt, the segment may continue to drive growth. The Rajpur-Dariba 100-kilotonne-per-annum (ktpa) smelter is expected to be commissioned in the third quarter of the financial year. Increasing silver capacities to 500 ktpa also bode well for the company, given the surge in the price of the metal.

However, there is some uncertainty over Tuticorin copper expansion, as the plant got an unfavourable verdict from the Madras High Court on environmental issues. However, increased merchant power sales from Balco and Sterlite Energy augur well, according to analysts at Angel Broking. They expect net profit to grow 20 per cent year-on-year to 4,500 crore in 2010-11. The stock, at `169.15, trades 12.6 times 2010-11 and 8.9 times 2011-12 estimated earnings.

Skorpion acquisition strengthens the company's zinc-lead segment, which has been the key growth driver