Near-term challenges persist for Sterlite

Sterlite’s growth continues to be driven by Zinc and Lead segment, its second largest revenue contributor. In contrast, lower bi-product sales and realisations continue to remain an overhang on its largest segment, copper. Going ahead, though the company is expecting gradual improvement in TcRc margins (copper) and making strong efforts to improve profitability in the aluminium segment, the gains may not accrue soon given its long-term contracts in copper business and secondly, sourcing of alumina, a key input, continues to be a challenge. The power segment, which had seen higher supplies leading to grid failures, too, is only expected to see a gradual recovery.

“The company thereby can only give returns to the investors in the medium term; though in the near-term clearances of category-B iron-ore mines in Karnataka can provide trigger to the stock,” feels Giriraj Daga at Nirmal Bang. Post results, most analysts have target prices of Rs 105-115 for the stock trading at Rs 115.

Power, aluminium to see gradual recovery

The power segment sales are yet to see improvement after being affected by continued evacuation limitations that were imposed after Northern and Eastern region grid failure in August 2012. As a result, Sterlite Energy operated at only 31% plant load factor (PLF) during the quarter. The segment (five% of overall revenues) is likely to see gradual growth and management is optimistic of PLF increasing to 50% during March 2013 quarter.

However, the problems with Aluminium segment continue to compound. At Vedanta Aluminium, alumina production got a hit with refining getting suspended at Lanjigarh on the back of poor bauxite (raw material) availability. The company, however, continues its efforts on improving its operating efficiency. In spite of having to use imported alumina, the cost of production of aluminium has been curbed.

On Vedanta Aluminium, analysts at Emkay observe that while alternative sources for bauxite are being looked into, the company is evaluating a possible trade-off between power sales and starting of its 1.25 million tonnes per annum (MTPA) smelter at Jharsuguda. They believe this won’t happen any time soon, as sourcing of alumina and power would continue to be an overhang.

Positively, for BALCO, its coal block has got Forest-II clearances. The benefits of this will be gradual and the company is expected to mine one MTPA of coal during FY14.