Analysts bullish on Sterlite's copper business

NetScribes/Salil Panchal

Analysts tracking the Sterlite counter are likely to re-rate the counter with the underlying message of a strong positive for its copper business.

The company, which on September 25 disclosed plans for its copper and metals businesses, is on schedule so far as its Rs 1.6-billion net profit target for the fiscal 2001 is concerned.

There is, however, uncertainty relating to valuations for the optic fibre business following its de-merger. The optic fibre business has shown strong growth over the past three months. However, analysts maintain that this business should be valued on the lines of a commodity business and not as per telecom valuations.

Satish Ramanathan, analyst with I-Sec, in an update dated September 26, has not given any recommendation for Sterlite Industries post de-merger. Commenting on the valuation, he said that metal companies historically have not attracted strong valuations.

"The current enterprise value (EV)/EBITDA for Nalco and Hindalco are 3.8X and 6.1X. Assuming that due to higher growth, Sterlite achieves a 7X EBITDA, the assumed market cap will be Rs 15 billion. This gives a fair value of Rs 270 per share,'' he said.

The Sterlite board, on September 25, disclosed its targets. It plans to achieve a CAGR of 37 per cent in sales and a 50 per cent increase in the bottomline over the next two years. The net profit for the metals business for fiscal 2000 was Rs 1 billion with an EBITDA of Rs 3.04 billion. Financial costs will reduce by 50 per cent in the next couple of years and Sterlite expects to be debt-free in the same period.

To achieve this objective, Sterlite will focus on higher sales volumes, lower cost of production and an improvement in efficiencies. It is also looking at acquiring overseas mines to enhance profitability.

According to Sanjay Chabbria, an analyst with SMIFS Brokerage, the EPS for Sterlite's copper business is expected to be 29, in 2004. Global copper prices are expected to be robust over the next 18 months. The global demand-supply scenario is expected to reverse to a shortage of supply in the next year, which would keep prices up, a copper analyst at eMecklai said.

An analyst with Sun F & C AMC said, "Sterlite will continue to hold the edge in the copper business. The growth targets set out for the fiscal 2001 are realistic and will be met. In fact, the company is probably underplaying this fact. The concern is that if we were to remove the two businesses and look at the projected earnings for the optic fibre business (20-21 times earnings), there appears to be a hype in telecom. The optic fibre business is growing, but, in our view, it should be viewed in the same light as any other commodity." The new company - Sterlite Optic Technologies - is set to be listed at the local bourses next month.

The Sterlite scrip closed at Rs 214 at the Bombay Stock Exchange on September 26, down 4.21 per cent against the previous close of Rs 223.4. A total of 1.7 million shares were traded in.

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