Grat news indeed for the metal heads.
SLT look like a really nice direct play in India IMHO
It´s not a junior, so slightly off topic
Sterlite Industries (India) Ltd.
By Bill Mann
* NYSE: SLT
* Home Country: India
* www.sterlite-industries.com
* Country of Incorporation: India
* Market Cap: $10.7 billion
* Dividend Yield: 0.7%
* ADR Ratio: 1:1
* Buy-Below Price: $15.8
* Company Risk Rating: High
Highlights:
Sterlite is one of India's largest companies, and it controls a hefty share of the country's copper, zinc, and aluminum markets.
These metals are used in cables, wiring, and a countless number of other items, and developing economies will continue to demand them.
Sterlite isn't a play on the global commodities boom. It's a play on global infrastructure -- India, specifically. Here, we've got a low-cost producer with a valuation that doesn't seem to fit its still-startling growth prospects.
Country Risk: LowCurrency Risk: MediumPolitical Risk: MediumEconomy Correlation: Medium
7.5
Metals aren't going out of style, whether you're talking about the copper in your power cables or the aluminum foil that's wrapped around last night's leftovers. This month, I've got a company that profits from the metals demand while enjoying exposure to a rapidly-emerging economy. If that doesn't sound intriguing enough, would you believe that this low-cost producer is available at an enterprise value of 4.2 times EBITDA, less than half that of its main competitors? Yeah, I'm impressed, too.
The Business
Sterlite Industries (India) Ltd. (NYSE: SLT), an Indian metals and mining company, has enjoyed one heck of a great run. Propelled by the metals boom, this gargantuan business has remained off limits to most investors until recently: In June, it held a massive $1.8 billion secondary offering on the New York Stock Exchange, bringing some 130 million shares to the U.S. market. Previously, investors could only buy the stock in India (which is closed to foreigners) or buy shares of its U.K.-listed parent company, Vedanta Resources. The founding Agarwal family is Sterlite's biggest shareholder, with a 53.6% stake in Vedanta Resources.
I said "gargantuan" when describing this business, and I meant it. Sterlite controls a mammoth share of India's copper, zinc, and aluminum markets, specifically:
* 42% of the country's copper market
* 64% of Hindustan Zinc Ltd. (HZL), India's only inte-grated zinc producer, which controls 61% of the domestic zinc market
* 51% of Bharat Aluminium Co. Ltd. (BALCO), which has a 25% share of India's aluminum market
Furthermore, Sterlite has exercised its right to acquire the 30% of HZL and the 49% of BALCO it doesn't own, both from the Indian government. (The government has proposed that the remaining 6% of HZL be distributed to HZL employees.) The government has disputed the exercise of both options by suing the company in Indian courts. We'll keep you posted on how it turns out.
Sterlite is also entering the power generation business, which holds enormous promise given chronic undersupply in India and improvements to the regulatory framework of the business. The company is investing $1.9 billion to develop its first phase generation facility, a 2,400-megawatt thermal coal-powered plant. This is a huge investment, but Sterlite has loads of experience managing power facilities that serve its mining and smelting operations, and it has been selling excess power into the grid for several years.
The Financials
Net sales increased by 96% from fiscal 2006 to fiscal 2007 to $5.6 billion. This resulted primarily from rising metal prices and increased sales from expanded smelting capacity. Cost of goods sold dropped from 76% of revenues to approximately 60% in two years, helping net margins skyrocket to 19.7%.
Following its offering in the United States, Sterlite has about $1.8 billion in cash, versus about $300 million in debt. Not included in these calculations, though, is the $1.9 billion it has committed to spend on its new power generation facility, as well as the potential for almost $2 billion to acquire the remainder of HZL should it be allowed to do so.
Sterlite generated $936 million in operating cash flow in 2007 and had capital expenditures of $588 million. Although zinc only accounted for 36% of revenues, it accounted for 67% of earnings. Obviously, satisfactory resolution of the ownership structure of HZL would be huge for shareholders.
Sixty-three percent of Sterlite's copper business, 50% of its zinc business, and 28% of its aluminum business went to export in fiscal 2007. These numbers have increased significantly from those of previous years. In total, 53% of revenues came from the export market in fiscal 2007.
The Valuation
Base metal prices have risen consistently for more than five years. Global zinc inventories, for example, have dropped by more than 90% in the last three years, down to 66,000 tons. At 4.2 times EBITDA, Sterlite's stock is priced as if commodity costs will go against it and the operating leverage it has generated from increased production will reverse. Still, prices do spike -- zinc shot up to roughly $2.10 per pound in December and has since settled in the $1.55 range. India's growth rates have exceeded 9% for years and are projected to grow by 7% to 9% per year through 2011. The company can sell everything it produces, and due to import tariffs, it can sell for higher prices in India than for export. These tariffs are being reduced and currently sit between 2% and 5%. What's clear to me is that the company partly chose to list in the United States (and Japan) rather than simply running such a large secondary in India because management believed the American market would value its shares closer to that of its competitors. I'd be happy if it did just that.
The Risks
We already know that Sterlite is dependent upon commodity pricing, but it also has a high fixed-cost business. In addition, lower commodity prices could have a dramatic impact on the company's profitability, and substantial risks are tied to its strong dependence on demand from India and the Far East. Of course, zinc, copper, and aluminum can be sold anywhere. Zinc pricing will remain the biggest tipoff to how well Sterlite is doing -- if it stays high (it should), this company will make money hand over fist. It should also be noted, though, that the power plant initiative is an awfully big bet for the company.
Global zinc demand has surged while supplies have remained static, resulting in enormous price increases. Activity like Xstrata's high-multiple purchase of Falconbridge show just how desperate mining companies are to add to their zinc reserves. Into this environment saunters Sterlite, dropping a massive secondary offering on the U.S. market. It's a cheap stock, and the size of the offering has kept shares from leaping higher. They won't stay down forever.
