Emkay maintains `Buy` rating on Sterlite Industries

Emkay Shares & Stock Brokers maintained `Buy` rating on Sterlite Industries with a price target of Rs 637 as against current market price of Rs 477. (September 26) Vedanta Resources has called off the Sterlite Industries (Q, N,C,F)* restructuring exercise in the wake of criticism from global investors. With the restructuring called off, the company is back to the same holding structure for the time being till a new scheme is announced. Broking house understands, the management is likely to announce a new restructuring scheme which will merge all aluminum assets in one roof. With this, Sterlite minority shareholders will enjoy the proportionate benefit of the entire expansion under VAL as earlier. Over the last 3 months, zinc prices have dropped by 4%. Prices have slumped by 23% from the beginning of the fiscal year. Due to the depressed prices and expectation of zinc metal to continue in surplus in FY09 through FY10, many zinc miners have already announced closure of operations. Aluminum at shanghai have hit 4yr low due to declining demand in China and rising stockpiles. Stockpile in Chinese warehouses have doubled since Jan 08 and demand continues to deteriorate. It is expected that there is a possibility of a large amount of production cut in China if aluminum prices are maintained at the current level. Aluminum prices in China are currently at 15,200 yuan/t whereas a large number of custom smelters have production costs in excess of 17,000 yuan/t. Sterlite will pay USD 2.6 billion in cash to buy out ASARCO. Broking house has not factored the benefits arising out of this acquisition, as the matter is pending before bankruptcy court of Texas. The matter is due for hearing on Nov. 17, 2008. Valuation Currently Sterlite is trading at EV/EBITDA of 2.4x broking houses FY10 estimates, which includes assumptions of buyout of HZL and BALCO stake. At broking house target price, Sterlite will trade at EV/EBITDA of 3.2x FY10 estimates, a discount of almost 15% to the global base metal companies. Source: IRIS Exclusive