Despite known operating performance and Hindustan Zinc results, Sterlite’s Q4 results surprised us positively. for Balco (at R2.3 bn, down 3% YoY); standalone copper operations (at R3.5 bn, up 46%); and international zinc assets (R4.4 bn, not comparable) drove a strong 42% YoY growth in overall Ebitda. Whereas higher by-product prices reduced copper smelting costs, higher aluminium prices and zinc production led to the surprise in the other two segments.
Ebitda for the quarter stood at R30.5 bn (+55% QoQ/ 42% YoY) driven by (i) higher concentrate sales at HZL, higher silver content in lead concentrates sold and (ii) strong operational performance at international zinc mines which contributed R4.4bn of Ebitda.
Besides below operating Ebitda, other income increased QoQ by R2.4 bn, due to higher non-operating income of R1.3 bn on account of forex gains and balance on increase in interest rates and investible surplus.
We expect Ebitda to increase 88% between FY11-13e, with contributions of 38% by HZL?s Ebitda growth, 35% by SEL, 22% by international zinc assets and balance by other businesses. Despite known enviro-political hurdles and our expectation of a 15% holding company discount, the stock still offers 20% upside to CMP (current market price) on our target. Current strong operating performance should act as a trigger for markets to notice the strong Ebitda growth in the stock again. Markets will likely discount strong earnings growth, despite known issues.
We value Sterlite on an SOTP (sum of the parts) basis and rate Sterlite Overweight. We derive a FY13e TP (target price) of R220, which implies a potential return of 19.8% (including FY13e dividend yield of 1.7% on the closing price of R189 on April 25, 2011).