Sterlite Industries India - a Strong Buy

This post is dedicated to Sterlite Industries India (SLT), a leading producer of copper, aluminium and zinc with mines across India, Australia and Zambia, and more recently its forays into the highly attractive electric power generation business. I first heard about this company from a friend who runs his own blog - Rant About It, so I will give him due credit for recommending this to me, and I followed it up with my own research below.

Business:
Sterlite India is a subsidiary of the London based Vedanta group of companies. It engages in production of copper, zinc, aluminium and electric power. It ranks #3 globally for zinc production, #5 for refined copper and on the way to becoming #10 for aluminium production. Graph below shows Sterlite's metal production plan, phase 1 of which has been delivered on time and within cost.

(Source: company website)

This increase in production is facilitated by Sterlite's commitment to increase smelting capacities in planned phases. Sterlite holds excellent reserve positions with #3 in iron ore, #4 in coal and #5 in bauxite reserves. Sterlite also recently acquired Sesa, a debt-free, cash-rich company to get an entry into the highly attractive iron ore business.

The company recently announced its intentions to enter the coal-based power generation on Nov 7, through its subsidiary Sterlite Energy, with plans to aggregate a total capacity of 10000 MW. The current capacity of India's largest power generator Tata, is about 2400 MW. Plans are to complete the 1215 MW Jharsuguda commercial power project in two phases, with Phase1 to be completed by mid 2009, and Phase2 by mid 2010. This foray into the power sector positions Sterlite to capitalize on the power shortage in India, with supply outweighing demands over the last few years. Rumours have it that the company plans to offer another IPO for Sterlite Energy sometime in the future.

Financials:
Sterlite (SLT) started trading on the NYSE back in June '07, and plans to use its proceeds to fund its recent entry into the electric power market. It has appreciated 60%, since being listed. Sterlite's parent company Vedanta is listed on the London stock exchange - it started trading back in December '03, and has appreciated 460% since. Sterlite is also listed in India on the Sensex, where it has delivered returns of 4000% over the last 5 years.

- 2007 revenue and EBITDA are up 84% and 152% respectively, over 2006.
- Strong balance sheet with net cash position
- Trailing and forward P/E at 12 and 16 respectively
- Debt of $2.2 bn as of March 2007, with 65% being long-term debt
- Revenue/EBITDA graph shown below:

(Source: company website)

Positives:
- Sterlite India is positioned excellently to take advantage of Indian as well as global growth in infrastructure, with rising demand for copper, its primary production.
- With the Indian ecomony growing at 9% in 2007, and predicted to be 10% in 2008, Sterlite revenues and income should grow accordingly.
- Management only invests in debt instruments, where asset protection is guaranteed.

Negatives:
- Vedanta's revenue base is largely in US dollars. With the Indian rupee rising against the dollar, export margins could be hurt.
- Short trading history on NYSE, and no analyst estimates.
- If the global economy goes into a recession, Sterlite's returns might turn out to be lackluster.

Overall:
- 3 analysts follow SLT on yahoo finance, with a rating of "Strong buy"
- Overall factors look good for Sterlite India, and I highly recommend it - buy on dips and average over 2-3 buys


Voluntary Disclosure: I currently do not own a position in SLT, but plan to start long one soon.
Sources: Sterlite corporate website