Capacity expansions key for Sterlite

Sterlite Industries’ stock, which had nearly halved over five months to Rs 85 in mid-December, has risen 24 per cent so far in 2012 on the back of a 9-12 per cent rise in metal prices. The decent December quarter numbers, which Sterlite announced on Monday, has only helped the stock stand out; it gained 3.1 per cent versus the Sensex’s 1.46 per cent.

Going ahead, analysts believe scope for further gains in metal prices is limited and, hence, increase in volumes is imperative to drive growth. In this context, the progress of Sterlite’s expansion plans in the aluminium and power businesses are key monitorables. They are also concerned over the increase in funding to group companies.

While these concerns prevail, a lot of it is also factored in and reflects in the stock’s low valuations. On a sum of the parts basis, analysts value it at Rs 130-160 as compared to the current price of Rs 111.25, which translates into a price to earnings (P/E) ratio of six and a book value of 0.7 times 2012-13 estimates.

“We maintain our ‘buy’ on the stock on weak valuations and most problems being discounted in the stock price. While there are early signs of recovery, any progress on lower costs and clearances to coal mine or aluminium expansion would be a key trigger for the scrip,” says Alok Nemani, who tracks the company at Nomura Equity Research, in a note on the company. Among other triggers could be the government deciding to sell its stake in Balco, a deal Jagdish Agarwal, research analyst at Emkay Global Financial Services, believes could conclude in 2011-12 itself.