Stock Review: Sterlite Industries

Sterlite Industries completed the acquisition of the zinc and lead businesses of Anglo American (Anglo) for a total of $1.5 billion (excluding cash in Anglo). This acquisition, Edelweiss Capital believes, will add `5,000 crore to the top line and contribute 14 per cent to the consolidated earnings before interest, taxes, depriciation and amortisation (Ebitda) in FY12E.

If the acquisition is one aspect of the story, silver is another key piece. Analysts are excited about silver production going on-stream from this year. Given that silver is a by-product derived from the company's lead and zinc operations, the cost of production is nearly zero. With production of silver commencing at its Sindesar Khurd mine, analysts are bullish about the stock.

The company will close FY11 with an annualised production of 180 tonnes of silver. Edelweiss expects this to go up to 290 tonnes in FY12 and 450 tonnes in FY13. Though mechanisation levels are relatively higher at this mine, there is not asignificant increase in overall mining cost per million tonne of metal. A new 350-tonne silver refinery is scheduled to be commissioned soon.

As silver prices stay buoyant, the company is likely to benefit from higher silver recovery rates. Analysts expect silver to contribute 9.6 per cent to Sterlite's FY12E Ebitda. Apart from the acquisition of the Anglo business and silver production, the Dariba lead and zinc smelter are also on track. The zinc smelter is up and running, while the lead smelter should get commissioned soon.

The negative overhang for the stock comes from Sterlite Energy, which is facing coal procurement issues. Though Sterlite Energy has received coal linkage for its entire 2,400 Mw power plant at Jharsuguda, analysts expect availability of only 50 per cent linkage coal as Coal India faces production issues. Analysts estimate the coal cost to go up 80 per cent and cut the effective plant load factor from 65 to 53 per cent for FY12.

With production of silver commencing at Sindesar Khurd mine, analysts are bullish on the stock