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[mehak1]

With HZL results already known, Sterlite consolidated results are relevant only for the aluminium and copper smelting business.

Sales were in line. EBITDA beat by 5% due to better copper metal yield and lower-than-expected costs at Balco (e.g. caustic soda).

Continued lack of clarity on 1) funding status of future expansion at Sterlite Energy (i.e. 3600 MW to 9600 MW); and 2) Whether the coal mines allocated to Balco can be used by Sterlite Energy for the Korba power project. For now our DCF model for the business
assumes 9600 MW by FY14.

Management expects a 20-25% decline in TcRc margins in FY09.

Supreme Court approval for Lanjigarh mine expected this quarter.

Sterlite continues to expect speedy completion of government stake acquisition in Balco and HZL. We have so far followed management guidance, but given current political realities, we
now believe this is unlikely in FY09, and accordingly revise numbers. FY09 EPS drops 18%, but valuation remains unchanged as we value Sterlite on EV/EBITDA.

As HZL reported 4Q08 results on 24 April, Sterlite consolidated results are relevant only for the copper smelting and Aluminium businesses (36% of our target price of Rs 982, Fig 2). EBITDA was 5% above our expectations due to:

Better copper metal yield. With sulphuric acid prices touching new highs, copper smelting costs have now become negative.

Balco EBITDA beat significantly, mainly as some cost increases (e.g. caustic soda) did not seem to have come about.

Depreciation accounting for the Aluminium business was changed from accelerated to straight line, and the accumulated adjustment was made this quarter. Fig 1 adjusts for this.

We build in delay of Balco & HZLstake acquisition to FY10
On the conference call, management reiterated their confidence in being able to complete acquisition of government stakes in Hindustan Zinc and Balco. We have so far followed management guidance, as they clearly have more visibility on negotiations with the government than we do. However, given current political realities, we believe the government’s stake sale is unlikely to happen in FY09, or at least until a new government takes control. This does not change our valuation for Sterlite, as we value the businesses on EV/EBITDA, and were building in stake purchase at market prices. Our EPS estimates for FY09 though do decline by 18% due to higher minority income.

Other key takeaways

The company continues with its impressive track record on execution – the first metal tapping is on for the Jharsuguda smelter Phase I; the 2400 MW Jharsuguda power plant is also on plan for commissioning September 2009.

Sterlite expects Supreme Court approval this quarter for mining to start at Lanjigarh.

Continued lack of clarity on funding status of future expansion at Sterlite Energy (i.e. 3600 MW to 9600 MW) and on whether the coal mines allocated to Balco can be used by Sterlite Energy for the Korba power project. For now our DCF model for the business assumes 9600 MW by FY14.

The company has US$3 bn in net cash, of which $1.9 bn is on HZL books – the company cannot use that.

Management expects TcRc margins to decline 20-25% in FY09.


Report card:

PE ratio         69.60       30/05/08
EPS (Rs)        13.43       Mar, 08
Sales (Rs crore)    3,595.28    Mar, 08
Face Value (Rs)          2   
Net profit margin (%) 6.57    Mar, 07
Last bonus             1:1         10/02/06
Last dividend (%)   200       28/04/08
Return on average equity 17.58   Mar, 07