INDIA DAILY July 30, 2009 India 29-Jul 1-day1-mo 3-mo Sensex 15,173 (1.0) 2.6 33.1 Nifty 4,514 (1.1) 2.8 29.9 Contents Global/Regional indices Dow Jones 9,071 (0.3) 6.3 10.8 Results Nasdaq Composite 1,968 (0.4) 6.7 14.9 Sterlite Industries: On expected lines FTSE 4,548 0.4 5.9 8.5 Jindal Steel and Power: Power storm Nikkie 10,083 (0.3) 1.3 14.2 Hang Seng 20,136 (2.4) 9.6 29.7 Cairn India: The real story starts now KOSPI 1,520 (0.3) 9.3 11.0 Tata Steel: Results below expectations Value traded - India Cash (NSE+BSE) 307.6 236.1 260.2 Hero Honda: Quarter not good enough for 11X EV/EBITDA Derivatives (NSE) 1,165.1 475.9 801 Punjab National Bank: Well managed on core front, but restructured assets are high Deri. open interest 982.6 587 987 Cipla: In line results Sesa Goa: Weak realizations Forex/money market Sun TV Network: In-line 1QFY10 results; valuations limit upside potential Change, basis points 29-Jul 1-day 1-mo 3-mo Lanco Infratech: Healthy growth in execution led by construction division Rs/US$ 48.4 18 30 (176) 10yr govt bond, % 7.1 - 13 89 Housing Development & Infrastructure: Reinitiate with ADD as financial strain eases Net investment (US$mn) 24-Jul MTD CYTD IRB Infrastructure Developers: Results boosted by construction business FIIs 153 1,500 6,470 Corporation Bank: Reports strong operational performance, retain BUY . MFs 27 326 843 IVRCL Infrastructures: Revenue disappoints - attributed to state elections Top movers -3mo basis Change, % Sobha Developers: In line quarter, maintain ADD Best performers 29-Jul 1-day 1-mo 3-mo ABAN IN Equity 1015.9 5.2 13.5 149.6 Hexaware Technologies: 2QCY09 results - massive outperformance, driven by massive WGS IN Equity 225.3 (0.9) 16.9 123.9 cost control SCS IN Equity 101.6 (2.0) 43.0 117.0 PSL: Strong performance SESA IN Equity 239.2 (2.5) 31.0 113.8 PUNJ IN Equity 242.8 1.2 15.8 109.6 Update Worst performers TCOM IN Equity 490.9 0.5 3.3 (10.5) Industrials: Power demand resilient; however, pricing may take a hit SUNP IN Equity 1187.5 (5.4) 8.9 (7.1) ESOIL IN Equity 142.2 0.4 (6.8) (1.4) RIL IN Equity 1930.4 1.2 (4.6) 6.9 RPET IN Equity 119.8 1.1 (4.5) 7.2 News Round-up • ABG bought 5.3% stake in Great Offshore through a series of block deals taking its stake to 7.3%. Rival Bharati owns 19.5% of Great Offshore and is expected to increase its price from Rs 405 to exceed ABG's offer. However, there are no indications about when it will do that. The two companies have time till August 24 to change their offer price (ET). • Anil Ambani said RNRL would approach the Supreme Court on Thursday, seeking a final hearing on the two-year-old dispute over gas pricing and supply on September 1, 2009 (BS). • A day after the RBI pegged economic growth at 6% for 2009-10, FM Pranab Mukherjee on Wednesday told the Rajya Sabha that he expects growth to remain at 6.7% level recorded in 2008-09 (FE). • The deficiency in the cumulative rainfall from the beginning of the monsoon season on June 1 in the country has gradually shrunk from 43 per cent on July 2 to 34 per cent on July 9, 24 per cent on July 16 and 18 per cent on July 23 (BS). Source: ET= Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Sterlite Industries (STLT) Metals JULY 30, 2009 RESULT Coverage view: Neutral On expected lines. Consolidated net earnings at Rs6.73 bn (-42% yoy and +12% qoq) Price (Rs): 622 were ahead of expectations. EBITDA at Rs102 bn (-44% yoy and +22% yoy) was in line. Target price (Rs): 550 However, recent declines in commodity prices, zinc and yield on treasury now BSE-30: 15,173 contribute 80% of PBIT compared to 62% yoy. Expansions are on track in the energy, aluminium and zinc businesses. We maintain our estimates and maintain our REDUCE rating on the stock. Company data and valuation summary Sterlite Industries Stock data Forecasts/Valuations 2009 2010E 2011E 52-week range (Rs) (high,low)740-165 EPS (Rs) 49.2 29.8 38.0 Market Cap. (Rs bn) 522.8 EPS growth (%) (23.6) (39.3) 27.2 QUICK NUMBERS Shareholding pattern (%) P/E (X) 12.6 20.8 16.4 Promoters 61.2 Sales (Rs bn) 214.5 203.8 223.1 • Net income at FIIs 19.3 Net profits (Rs bn) 34.8 25.1 31.9 Rs6.73 bn down MFs 3.5 EBITDA (Rs bn) 50.1 42.1 54.3 42% yoy and up Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.0 8.7 6.5 Absolute 2.5 51.7 (0.2) ROE (%) 14.3 8.1 8.4 12% qoq Rel. to BSE-30 (0.1) 14.0 (9.3) Div. Yield (%) 0.0 0.0 0.0 • Expansion on track Segmental performance ` Aluminium business: Aluminium business volumes at 72,000 tons were down 19% yoy due to shut down of BALCO I. Management has indicated that it does not intend to restart BALCO I unless aluminium rises substantially. PBIT at Rs750 mn was lower by 81% yoy and a loss of Rs495 mn qoq was higher than expected. ` Copper business: Copper volumes at 78,000 were lower by 10% qoq following operational issues. PBIT at Rs940mn was lower 63% yoy and 78% qoq and below expectations. PBIT margins were at 4.3%. Earnings continue to remain weak despite an increase in Tc/Rc margins due to weak prices of by-products such as sulphuric acid etc. ` Zinc business: Zinc volumes at 162,000 tons were higher 17% yoy and lower by 7% qoq. PBIT at Rs7.01 bn was lower by 23% yoy and higher by 38% qoq. ` Power business: Sterlite has for the first time reported earnings from the power segment which comprises of 123MW wind generators at HZL and 270MW power plant at BALCO. It sold 287MU of power during the quarter as compared to 74MU yoy. It reported a PBIT of Rs1.02 bn up 4.4X yoy. Expansions galore Aluminium: BALCO and Vedanta Aluminium (VAL) are expanding their aluminium businesses. ` BALCO (51% subsidiary) would expand capacity by setting up a new smelter of 325KT and 1,200MW captive power plant scheduled for commissioning by October 2010. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Sterlite Industries Metals ` VAL’s (29.5% associate company) current capacity at 250,000 tons would increase to 500,000 ton by end FY2010. The second phase of expansion to 1.75 mn tons would be commissioned in phases by March 2010. Alumina refining at Lanjigarh is being expanded to 5mn tons in phases and would be scheduled for completion by mid-2010. ` Power business: Expansion on 2400MW power plant is on track and would be scheduled for commissioning in phases by December 2009. ` Zinc business: Expansion at Rajpura Dariba is on track to increase capacity to 1.06 mn tons and would be commissioned by mid-2010. Maintain estimates; reiterate REDUCE rating We maintain our FY2010 and FY2011 EPS estimates at Rs29.8 and Rs38 respectively. We value Sterlite on an SOTP basis to arrive at a target price of Rs550 and maintain our REDUCE rating. We view the following uncertainties as impediments to valuation upside: (1) Commissioning of Niyamgiri mines in crucial for VAL as sustaining operations of 5mn tons of alumina production; (2) More allotments of linkage coal for the 2400MW captive cum merchant power plant; (3) Favorable settlement of ASARCO bankruptcy litigation as loss would open possibility of potential litigation. Interim results of Sterlite Industries , March fiscal year-ends (Rs mn) (% chg.) 1QFY10 1QFY10E 1QFY09 4QFY09 1QFY10E 1QFY09 4QFY09 Net sales 45,789 47,827 57,701 44,060 (4.3) (20.6) 3.9 Total expenditure (35,580) (37,973) (39,435) (35,669) (6.3) (9.8) (0.2) Inc/(Dec) in stock 3,351 - 1,154 513 190.5 553.9 Raw materials (24,507) - (26,008) (22,702) (5.8) 8.0 Staff cost (1,731) - (1,831) (1,791) (5.5) (3.4) Other expenditure (12,694) - (12,750) (11,688) (0.4) 8.6 EBITDA 10,209 9,854 18,266 8,392 3.6 (44.1) 21.7 OPM (%) 22.3 20.6 31.7 19.0 Other income 3,783 4,255 4,025 3,940 (11.1) (6.0) (4.0) Interest (712) (1,312) (874) (1,312) (45.7) (18.5) (45.7) Depreciation (1,736) (2,235) (1,655) (2,032) (22.3) 4.9 (14.5) Pretax profits 11,544 10,562 19,761 8,988 9.3 (41.6) 28.4 Extraordinaries/sales tax benefit - - - 799 Tax (2,305) (1,162) (3,808) (664) 98.4 (39.5) 247.0 Net income before minority interest 9,239 9,400 15,954 9,122 (1.7) (42.1) 1.3 Minority interest (3,219) (2,185) (4,470) (2,057) 47.3 (28.0) 56.5 Share of associates 707 (1,082) 27 (1,082) (165.3) 2,548.7 (165.3) PAT after minority interest 6,727 6,133 11,511 5,983 9.7 (41.6) 12.4 Income tax rate (%) 20.0 11.0 19.3 6.8 Ratios EBITDA margin (%) 22.3 20.6 31.7 19.0 ETR (%) 20.0 11.0 19.3 6.8 EPS (Rs) 9.5 8.7 16.3 8.4 Volume details ('000 tons) Copper mined metal content 7 8 7 8 (12.5) - (12.5) Copper cathode 78 88 68 88 (11.4) 14.7 (11.4) Aluminium ingots 72 85 89 85 (15.3) (19.1) (15.3) Zinc mined metal content 162 175 138 175 (7.4) 17.4 (7.4) Zinc cathode 139 151 128 151 (7.9) 8.6 (7.9) Earnings drivers (US$/ton) Average INR:USD 48.7 48.0 41.6 49.8 1.4 16.9 (2.2) Average Zinc prices 1,523.0 - 2,146.0 1,209.0 (29.0) 26.0 Average Aluminium prices 1,541.0 - 3,004.0 1,410.0 (48.7) 9.3 Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Metals Sterlite Industries SOTP-based target price of Sterlite Industries is Rs550/share SOTP-based target price of Sterlite, March fiscal year-ends, 2011E basis (Rs mn) EBITDA Multiple EV Sterlite's stake Attributable EV EV (Rs bn) (X) (Rs bn) (%) (Rs bn) (Rs/ share) Aluminium business BALCO 8 6.0 50 51.0 25 24 Vedanta Aluminium (VAL) 21 Copper business Copper smelting business 10 6.0 58 100.0 58 69 Copper mining 2 Zinc business Hindustan Zinc 36 6.0 218 64.9 141 135 Power business Sterlite Energy (a) 57 Total enterprise value 225 308 Less: net debt (206) (245) Attibutable market capitalization 431 553 Target price (Rs/share) 550 Notes: (a) We have valued investments in the power business (Sterlite Energy) on DCF-to-equity implying a P/BV of 2X (b) We have applied 20% holding company discount in case of stakes in Hindustan Zinc, BALCO, Sterlite Energy and CMT.