Sterlite Industries Q3FY13 to be unexpectedly weak and below expectations

Equity Bulls expects unexpectedly weak results from both Sterlite and HZL for Q3FY13E despite better LME realizations on both YoY and QoQ basis and this could surprise the street negatively in our view. They expect subdued results on account of:

i) higher proportion of custom smelting volumes in HZL for lead & silver (~18-20% custom volumes in refined sales) and low refined zinc volumes (flat QoQ at 1.65 lakh tonne),

ii) lower merchant power volumes from SEL (down by ~14% QoQ at 1.66bn units) due to continuation of evacuation issues,

iii) higher losses from VAL operations due to low captive alumina & bauxite availability and negative forex fluctuations and iv) higher depreciation and negative impact of rupee depreciation resulting in reduced PAT on a group basis for Sterlite.

The stock has rallied smartly in the recent few weeks and is trading at Rs121, well above our target price of Rs115. We have been maintaining our positive view on the stock but expect upside to remain capped at current levels in the wake of our weak results expectations (well below current Bloomberg consensus) and slow progress on commissioning of expansion projects across assets.

Aluminium Operations

- BALCO - Aluminium volumes expected at ~60k tonne and profitability seen flat QoQ. The 300 MW CPP has not been commissioned still due to regulatory approval delays and commissioning of the associated smelter is expected to be delayed further. Sterlite has spent ~US$1.4bn (out of total capex of US$1.8bn) for smelter and 1200 MW CPP expansion at BALCO till date.

- VAL - Lower alumina production and other cost increase expected to result in lower QoQ EBITDA. PAT is expected to be significantly affected by negative forex movements. Attributable loss from VAL for Sterlite in Q3FY13E expected to be at ~Rs1.6bn.

Consolidated Operations

- Consolidated result for Sterlite is expected to remain muted for Q3FY13E and progress on commissioning of various expansion projects remains very slow. Equity Bulls sees consolidated EBITDA margin of 22.8%, flat YoY. Negative impact of forex and higher depreciation is expected to keep group PAT subdued. Estimates for EBITDA and adj-PAT for Sterlite are below Bloomberg consensus by 12% and 21% respectively. Similarly EBITDA and PAT estimates for HZL are also well below current Bloomberg consensus estimates.