Buy Sterlite for target Rs 765: STCI Capital Market

MUMBAI: STCI Capital Markets has initiated ‘buy’ on Sterlite Industries for a target price of Rs 765. The company has a substantial market share in each of the base metals: aluminium, copper, zinc and lead. Strong cash generations over the last two years and successful completion of $2 billion ADS in 2007 has provided the company with funds to spread its wings across regions (acquisition of ASARCO) and foray into new business segment (commercial power generation). Despite declining LME prices, cost reduction through capacity addition and strong CAGR volume growth of 21.6 per cent over the next two years, zinc business will continue to deliver 57 –58 per cent of the consolidated operating profit. Further, with major capacity addition lined up in HZL for 2010-11 STCI expects the performance of the zinc business to be a key driver for growth in Sterlite. Sterlite has been able to commission its expansion projects in zinc and aluminium much ahead of schedule and within budget. Such initiatives by the management avoid cost over run and help the company earn better discounting due to cash generation ahead of expectations. It also represents strong management skills towards project execution. Vedanta Aluminium - aluminium smelter capacity that would be commissioned in FY09E would provide significant profitability growth over the next two years. Further, Sterlite Energy commissioning of the 600MW of thermal power plant in December’09 of the 2400 MW that would come up in phase over the next one year there after would de-risk the business of sterlite. STCI feels substantial value unlocking to be done in the subsidiary in the long run. Sterlite’s consolidated has cash and cash equivalents of Rs 11,780 crore as on March 2008 which provides it with the required fund to undertake its recently announced acquisition of ASARCO which could substantially drive its revenue and profitability or alternatively fund its capital expenditure in Sterlite Energy or acquisition of government stake in Balco and Hindustan Zinc. Sterlite is currently trading at P/E of 9.5x and 8.7x its FY09E and FY10E EPS of Rs 66.4 per share and Rs 72.3 per share respectively. ---economictimes.indiatimes.com