sterlite ind icicid 270110

8/9/2019 Sterlite Ind IciciD 270110

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Analysts Name

Pankaj [email protected] [email protected] [email protected]

Sales & EPS trend

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Crore)

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120

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Net Sales Atrrib. EPS

Stock Metrics

Bloomberg Code STE IN

Reuters Code STRL.BO

Face value (Rs) 2

Promoters Holding 52%

Market Cap (Rs cr) 64542

52 week H/L (Rs) 928/215

Sensex 16289

Average volumes 65301 Comparative return metrics

Stock return (%) 3M 6M 12M

Sterlite 5 35 260

Hindalco 20 83 250

Nalco 27 54 148 Price Trend

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Jan-09 Jun-09 Sep-09 Jan-10

(InRs)

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SIIL Nifty

January 27, 2010 | Metals & Mining

Initiating Coverage

Sterlite Industries Limited (STEIND)

The metal czarSterlite Industries (SIIL) is Indias largest non-ferrous metals and miningcompany with its primary business spread across copper, aluminium, zinc& lead and power. With its world class mining and smelting assetsensuring low cost of operations across all base metals (especially zinc),strong organic growth pipeline through massive expansion and robustbalance sheet with cash/share of ~Rs 300 (December 2009), SIIL is set toreap the benefits of the current commodity up cycle. We expect SIIL toregister an FY09-12E CAGR of 23.2% and 32% in net sales and net profit,respectively, and initiate coverage on the stock with a BUY rating.

Unprecedented organic growth story unfoldingSIIL combines an impressive mix of world class assets across base

metals, diversification benefits through merchant power foray,excellent project execution and value addition skills and visibility ofvolume growth in the years ahead. Anunprecedented organic growthstory is unfolding at SIIL with capacity expansion ranging from 40-175% across base metal products slated to be on stream by FY12E.

Zinc operations The real cash cowSIILs zinc operations have emerged as the real cash cow with lowestdecile cost structure on a global level and integrated model amidextremely robust zinc and lead prices. We expect zinc operations tocontribute ~45% to SIILs consolidated FY12E bottomline.

Aluminium operations Diversified yet powerful growthDiversification through selling of captive power and smelterexpansions in Balco and VAL backed by low cost integrated structurewould result in power packed growth in aluminium operations.

Valuations Positive surprises and upside remainAt the current market price of Rs 768, the stock is trading at 7.9xFY12E EPS of Rs 96.8. With positive surprises (minority buyouts &captive bauxite feed kick-off) expected in due course, we expect anupward re-rating of the stock, going forward. We value the stock usingsum of the parts methodology. We are assigning a target price of Rs918 to the stock and initiating coverage on SIIL with a BUY rating.

Current PriceRs 768

Target PriceRs 918

Potential upside19%

Time Frame12-15 months

BUY

xhibit 1:Key financialsFY08 FY09 FY10E FY11E FY12E

et Sales 24705.4 21144.2 24103.3 27667.6 39557.6

BITDA 8199.7 5008.3 6002.0 8243.4 13000.9

BITDA Margin (%) 33.2 23.7 24.9 29.8 32.9

trrib. PAT (Adj.) 4518.4 3540.0 3341.0 4551.1 8134.7

trrib. EPS 63.8 50.0 39.8 54.2 96.8

PS Growth (%) -21.7 -20.4 36.2 78.7

ER (x) 12.0 15.4 19.3 14.2 7.9

/BV (x) 2.4 2.1 1.8 1.6 1.3

V/EBITDA (x) 4.9 7.8 7.1 5.2 2.7

ONW (%) 28.0 14.8 10.8 11.9 18.4

OCE (%) 33.0 16.4 13.7 14.1 19.0 ource: Company, ICICIdirect.com Research


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Table of Content

Company background.................................................................................. 3Investment rationale .................................................................................... 6

Sterlite Copper operations Getting the expansion pill..................................................................10Sterlite Aluminium operations Creating unmatchable scale........................................................13Sterlite Zinc operations (HZL) The real cash cow........................................................................19Commercial Energy (SEL)* Powerful foray into Power................................................................24

Risks & concerns....................................................................................... 28Financials .................................................................................................. 29Valuations.................................................................................................. 32Tables & ratios (Consolidated Financials) .................................................. 35Annexure: .................................................................................................. 38


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Company background

Sterlite Industries India Limited (SIIL) is the principal subsidiary of Londonbased Vedanta Resources plc. SIIL is Indias largest non-ferrous metalsand mining company. Sterlites principal operating companies compriseHindustan Zinc Ltd (HZL) with its fully integrated zinc and leadoperations; SIIL and Copper Mines of Tasmania Pty Limited (CMT) withits copper operations in India/Australia; Bharat Aluminium Company(Balco), with its aluminium and alumina operations and Sterlite EnergyLimited (SEL) with its commercial power generation business.

SIIL boasts of a cost of production (COP) in the bottom half of worldproduction cost quartile across all its products and controls 45.7%, 79%and 28% of Indias market share by volume in copper, zinc andaluminium, respectively. The company is currently going through amassive expansion phase with capacity additions being planned acrossall metal product categories and aggressive foray into power generation.

Exhibit 2:Sterlite group structure

Source: Company, ICICIdirect.com Research

Shareholding pattern (Q3FY10)

Shareholder % holding

Promoters 52.0

Institutional investors 20.8

Other investors 3.9

General public 23.3

Promoter & Institutional holding trend (%)

61.2 61.752.0 52.0

16.9 17.8 20.822.2

0.0

20.0

40.0

60.0

80.0

100.0

Q4 Q1 Q2 Q3

(%)

Promoter Holding Institutional Holding

Sterlite Industries

(India) Ltd (SIIL)

Hindustan Z inc Ltd (HZL)

Bharat Aluminium

Company Ltd (BALCO)

Sterlite Energy Ltd (SEL)

Vedanta AluminiumLimited (VAL)

Copper mines of

Tasmania Pty Ltd (CMT)

64.9%

51%

100%

100%

29.5%

Copper

Zinc

Aluminium

Power

Consolidated

Group


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World class smelting & mining assets

SIIL owns world class smelting and mining assets that are distributedacross various locations in India. The company operates its copperbusiness from Tuticorin in Tamil Nadu, aluminium business fromChhattisgarh and zinc business from Rajasthan. The company owns

significant mining assets along with captive power plants that make SIIL acompletely integrated metal play with low cost of production.

Exhibit 3:Well distributed metal and mining assets


Exhibit 4:Current installed capacity detailsSmelter Capacity

(ktpa)

Mines Capacity

(MTPA)

Mines Total

Reserves &

Resources (MT)

Captive Power

(MW)

Copper 400 2.5 11.3 46.5

Aluminium

BALCO 345 0.9 7.3 810

VAL 250 675

Zinc 669

Lead 85

Silver (tpa) 150

6.8 270 314


Both smelting and mining assets across

different metal products are well

distributed and are undergoing expansion

currently


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Revenue break-up and EBIT margin copper and zinc dominate

Copper contributes ~50% of the total revenue of SIIL on account of beingthe costliest base metal in the companys kitty. Zinc (consisting of zinc,lead and silver) and aluminium operations are other significantcontributors whereas the share of power has started going up and isexpected to improve further with power capacity build-up at SEL.

Exhibit 5:Revenue contribution break-up FY08FY08

Aluminium,

17%

Copper, 50%

Power &

Others, 2%

Zinc & Lead,

32%


Exhibit 6:Revenue contribution break-up FY09FY09

Copper

50%

Power &

Others

6%

Zinc & Lead

26%

Aluminium18%


Zinc operations contribute the most at the EBIT level and have thehighest margin in the companys metal portfolio due to full availability ofcaptive resources resulting in very low cost of production. Coppermargins depend on treatment and refining charges (TC/RC) movement inthe international market. Aluminium operation margins depend on LMEprice movement in aluminium but they have the flexibility to sell power intimes of extreme price fall in aluminium in international markets.

Exhibit 7:EBIT margins - product wise (FY08)FY08

Zinc & Lead,

69%

Aluminium,

28%

Copper, 8%Power &

Others, 14%


Exhibit 8:EBIT margins - product wise (FY09)FY09

Power &

Others

22%

Zinc & Lead

49%

Aluminium

18%

Copper

11%


Copper operations make the highest

revenue contribution but zinc operations

have the highest margin


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Investment rationale

SIIL combines an impressive mix of world class assets across basemetals, diversification benefits through commercial power foray,excellent project execution & value addition skills and visibility ofvolume growth in the years ahead. The company boasts of a strongcash rich balance sheet. Along with its ability to generate robust cash

flows this lends credibility to its ability to complete the minority stakebuyouts of Balco and HZL sooner rather than later and also look for anyother attractive asset across the world in base metals, particularlycopper. We expect metal volumes to keep improving across allproducts due to continuous expansion and debottlenecking activities.This will result in impressive sales CAGR of 23.2% over FY09-12E andsteady cost reduction measures to help increase return ratios, goingforward with net profit CAGR of 32% over FY09-12E. We are assigninga target price of Rs 918 to the stock and initiating coverage on it with aBUY rating.

Capacity build-up through excellent project deliverySIIL has achieved a smart build-up in capacity during the last few yearsacross all base metals leveraging its excellent project delivery skills.Capacities across copper, aluminium and zinc have increased by 100%,500% and ~50%, respectively, during the last few years.

Exhibit 9:Impressive capacity build up

0 0 0

800660

1750

1064

2400

240100

514345

400250

754

0

500

1000

1500

2000

2500

3000

Copper Aluminium -

BALCO

Aluminium - VAL Zinc & Lead Merchant Power

(MW)

(In'000tonne)

FY2006 FY2009 FY2012E


Capacity expansion is in progress continuously at SIIL and capacities areexpected to increase by 100% in copper, 174% in aluminium and 41% inzinc & lead by FY12E. With the recent announcement of expansion,copper capacity is expected to reach 800 ktpa by 2011. HZL is alsoaugmenting its zinc capacity by 210 ktpa and lead by 100 ktpa. This willmake it the largest integrated zinc-lead producer in the world. Aluminiumcapacity is expected to almost double at Balco through the setting up ofthe 325 ktpa smelter at Korba. Aluminium capacity at SIILs associatecompany, VAL is set to reach astronomical levels of 1.75 mtpa on theback of huge investments planned from the companys parent, Vedanta

Resources plc. Power foray through SEL is expected to result in 2400 MWof operational merchant power capacity before FY11 end.

Capacities across all base metals have

risen smartly and continue to expand

Capacities will increase by 100% in

copper, 174% in aluminium and 41% in

zinc & lead by FY12E


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Enviable project execution record and strong pipeline

Sterlite has had an outstanding and enviable record of delivering projectson or before schedule due to superior project execution skills backed bystrong operating cash flow generation, swift debt arrangement through

local and international lenders and best management practices in theindustry. SIIL has generated operational cash flows to the tune of ~Rs17500 crore during the last three fiscal years (FY07-09) and has been ableto complete expansion across all its three major base metal productrange with ~3 lakh tonne expansion in HZL, ~2.5 lakh tonne at Balco and2 lakh tonne at Tuticorin copper smelter in Sterlite during the last fewyears. The company has diversified its product structure with a significantinvestment in its commercial power foray; Sterlite Energy which is on theverge of commissioning its first unit of 600 MW in Q4FY10E. Thecompany is also on target to commission projects with significantcapacities across zinc-lead, aluminium and copper in the next two years.We expect these to be delivered largely on time.

Exhibit 10:Excellent delivery of projects


SIIL has delivered projects at a rapidpace despite being cost competitive on

a global level across all base metals

expansion

Chanderiya Hydro 1

170 ktpa

Chanderiya Ausmelt

Lead Smelter

50 ktpa

Chanderiya Hydro 2

170 ktpa

Chanderiya and

Debari Zinc

debottlenecking

88 ktpa

Debari Zinc and Lead

Smelter

210 & 100 ktpa

Delivered Under Implementation

2005 2006 2007 2008-09 2010-11 2011-12

BALCO II , Korba

245 ktpa

VAL, Jharsuguda I

250 ktpa Metal

1.4 MT Alumina

VAL, Jharsuguda II

250 ktpa Metal

0.6 MT Alumina

VAL , Jharsuguda III

1250 ktpa Metal

3 MT Alumina

BALCO III

325 ktpa

Tuticorin smelter

expansion

100 ktpa

Tuticorin smelter

debottlenecking

100 ktpa

New smelter at

Tuticorin

400 ktpa

SEL Merchant Power plant (600 MW x 4)

Zinc Aluminium Copper Power


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Expansion pipeline execution largely on track

SIILs expansion pipeline spreads across all base metal products in itsportfolio as well as power. Barring some delays in commissioning ofpower units in SEL according to initial timelines, all expansion projects

are running according to schedule. This reflects the companys inherentstrength in delivering projects in a record time schedule, therebyachieving cost savings and economies of scale.

Exhibit 11:New capacity addition (project details)

Product

Associated

Company Project

Capacity

Expansion

Planned Completion Date

Project Cost

(US$ mn)

Spent till

Q2FY10

(US$ mn) Project Progress

Alumina VAL Lanjigarh I Alumina Refinery 1.4 mtpa FY 2010 1015.3 874.6 Nearing completion

Debottlecking Lanjigarh I 0.6 mtpa Mar-10 150.0 35.6 On track

Lanjigarh II Alumina Refinery 3.0 mtpa Mid 2011 1570.0 411.5 On track

Aluminium BALCO Korba III Smelter325 KT, 1200

MW CPP Sep-11 1820.0 483.5 On track

VAL Jharsuguda I Smelter 0.5 mtpa

Jharsuguda I Smelter 1,215 MW CPP

Jharsuguda II Smelter 1.25 mtpa Sep-12 2920.0 960.4 On track

Zinc HZL Smelting - Debari 2.1 ltpa Zinc Mid 2010

1.0 ltpa Lead Mid 2010

160 MW CPP Mid 2010

Mining RA 5 to 6 mtpa Mid 2010

SK 1.5 mtpa From mid 2010

Kayar 1 mtpa End 2013

Copper SIIL Smelting - Tuticorin 4.0 ltpa

160 MW CPP

Power SEL Talwandi Saboo Power Project 1,980 MW Q3 2014 2150.0 77.9

Project revived, work to pick

up slowly

SEL IPP 2,400 MW Q4FY10 to Q3FY11 1900.0 1215.5

1st unit of 600 MW to start in

Q4FY10

Mid-2011 500 5.8

FY 2010 End Nearing completion2112.8 2103.0

720 432 On track and expected to be

commisioned on time

Recently announced, work

commenced

On track


SIILs announced and ongoing expansion plans (including Vedantas VALexpansion plans) involve a total attributable capex of ~US$9.4 billion.Out of this, US$3.5 billion has already been spent while the remaining~US$5.9 billion is slated to be spent in the next three years. With~US$5.1 billion of cash, cash equivalents and liquid investment on itsbooks currently and a major portion of investments into SEL expected tocome from SELs IPO (soon to be launched), we do not foresee any cashrequirement problems for the capex of SIIL. The company has recentlyraised US$2.1 billion through a public issue of ADS and convertiblenotes. SIIL is keeping itself well funded for i) groups capex requirementsgoing forward, ii) any possible acquisition of quality assets globally thatwould trigger inorganic growth and iii) minority stake purchases in Balco

and HZL from the government. The company has indicated that it expectsto achieve the minority stake buyouts in both its subsidiaries before the

SIILs massive expansion pipeline execution

has remained largely on track and is also

pre-funded


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end of FY10E. We believe the same would remain as a positive trigger forthe stock in the short to medium term.

Exhibit 12:Funds requirement (US$ bn)Purpose Funds Required Already Spent/Funding in Place Balance Required

Minority Stake Buyouts 3.5 3.5

Copper Expansion 0.5 0.5

BALCO Expansion 1.8 0.5 1.3

Sterlite's share of

contribution to VAL equity 1.4 1 0.4

Sterlite Energy 1.9 1.9 0

Total Funds Requirement 5.7

Less: Cash & Equivalents 5.1

Total Balance Required 0.6


Diversified low risk organic growth

SIIL has created a structure of diversified low risk organic growth for itselfby undertaking expansion activities across all base metals under itsportfolio and stepping into the commercial energy space throughmerchant power generation. The company already operates under verycompetitive cost of production (COP) levels across all base metals buthas a target of taking the COP to the lowest quartile on a global basis bythe time all its ongoing expansions are completed through operationalimprovements, captive resource developments and cost savings throughbetter management and economies of scale.

Exhibit 13:Diversified low risk organic growth

*Including attributable production & capacity from VAL, ** By 2014


Sterlites business model is well diversified

and its cost of production is well below the

current base metal product prices resulting

in low risk from the commodity cycle

Copper

(TC/RC~14c/lb)

Aluminium

(US$2300/tonne)

Zinc & Lead

(US$22-

2500/tonne)

Silver

Merchant Power

313 ktpa

381 ktpa*

617 ktpa

105 tpa

NA

FY09 Production

800 ktpa

1185 ktpa*

1065 ktpa

500 tpa

4380 MW**

Target Capacity

(By FY12E)

10.9 c/lb

US$ 1350/tonne

US$ 780/tonne

Co-Product

H1FY10 Cost of

Production

Target Cost of Production

& Quartile (By FY12E)

6 c/lb

Lowest Quartile

US$ 900/tonne

Lowest Quartile

US$ 600/tonne

Lowest Quartile

Product

Current Prices


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Sterlite Copper operations Getting the expansion pill

Steady performance despite market ups & downs

Copper operations of SIIL have delivered a steady performance. This wasdespite a volatile environment in the copper industry and fluctuatingglobal TC/RC rates as the custom smelter of SIIL is one of the most

efficient in India. The company has a relentless focus on maintainingoperational efficiencies leading to high metal recovery, by-productmanagement, captive power and low transportation costs (due tostrategic plant location, being closer to ports), which has led to lower unitconversion costs (costs of smelting and refining) on a constant basis. Thecompany even had a negative unit conversion cost when by-productrealisations were firm.

Exhibit 14:Copper production and sales

169

313339313

354

365 435

0

50

100

150

200

250

300350

400

450

500

FY07 FY08 FY09 H1FY10 FY10E FY11E FY12E

(In'000tonne)

0

2000

4000

6000

8000

10000

1200014000

16000

18000

20000

(InRscrore)

Production Sales

Copper sales CAGR of

14.9% during FY09-12E


SIIL has maintained steady production levels and sales over the last fewyears. The company is expected to increase the sales volume, going forward, on the back of maintenance and repair activity completion atexisting capacities, which was undertaken during FY09. Also, marginsthat had taken a hit during the commodity slowdown have startedimproving. We expect copper sales volume CAGR of 14.9% during FY09-12E. We expect margins to improve, going forward, from H2FY10 levelsas TC/RCs seem to have stabilised and by-product realisations are firmingup.

Exhibit 15:Margins and TC/RC

5.2

9.87.1

8.2

2.6

3.7

5.1

1313

1413.2

11.7

31.1

15.7

0

2

4

6

8

10

12

FY07 FY08 FY09 H1FY10 FY10E FY11E FY12E

(%)

0

5

10

15

20

25

30

35

(UScents/lb)

EBITDA Margins % Realised Tc/Rc (c/lb)


Copper operations revenue contribution in

SIILs total earnings

FY12E (Rs Cr)

17563.7

21993.9

Copper SIIL-Others

687.9

229.9

Copper SIIL-Others

Copper operations per share contribution (Rs)


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Expansion at Tuticorin smelter under way

SIIL has recently announced the capacity augmentation of copperoperations by 400 ktpa with a captive power plant of 160 MW. This isexpected to double the copper smelting capacity of the company to 800ktpa by FY12E and help SIIL control ~8% of global smelting capacity.

Exhibit 16:Capacity expansion commences

400

800 206.5 40

46.5 113

0 200 400 600 800 1000 1200

Current

FY12E

Smelter Capacity (ktpa) Captive Power (MW)

Captive Mine Reserves (lakh tonne)

Capacity push to derive

revenue growth


Concentrate sourcing to focus more on long term contracts

The margin in the copper business depends mainly on realised TC/RCs.This, in turn, depends on the sourcing mix of the copper concentrate aswell as prevailing rates of TC/RC in copper in the spot and contractmarkets. The higher the realised TC/RC, the better the companys

margins from copper smelting business. The company plans to shift asignificant percentage of concentrate buying from spot and traders to fixed contract long-term buying method as concentrate sourcing fromcaptive mines in Mt Lyell, Australia is expected to keep reducing due todepletion of reserves and resources (FY09:11.3 MT) and limited availablelife span. In contrast, the total concentrate requirement would go upsubstantially after the smelter expansion is complete.

Exhibit 17:Concentrate sourcing target

13 10 9 8 7

2845 43

53 58

13

2313

7 546

2235 32 30

0%

20%

40%

60%

80%

100%

2006 2007 2008 2010E 2011E

Captive Mines LTC Traders LTC Spot


Copper capacity will increase by 100%

through brownfield expansion at Tuticorin

TC/RC could improve through more long

term sourcing of concentrates


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Hunt for attractive copper assets continuesSIIL boasts of a strong balance sheet with standalone debt-equity ratio of0.27 in FY09 and cash and investments exceeding Rs 13,000 crore. Thecompany has recently raised US$2.1 billion through an ADS issue (equityof US$1.6 billion) and convertible senior notes (debt of US$500 million).SIIL has prepared itself for funds allocation for copper expansion (US$500

million) as well as for acquiring any attractive copper assets in India andabroad, particularly for sourcing copper concentrates.

Exhibit 18:Healthy standalone balance sheet

0

5000

10000

15000

20000

25000


(In

Rscrore).

0.15

0.20

0.25

0.30

Shareholders Funds Investments & Cash Loans Debt:Equity (R.H.S)


With the ASARCO acquisition battle out of the way and fundsarrangement in place through ADS and notes issue, we expect Sterlite toaggressively hunt for attractive assets in the base metals space,particularly copper and continue on its strategy of adding value to assetswith inherent potential in order to obtain long term sustainable benefits.The companys strong balance sheet gives us the confidence that anystrategic asset acquisition announcement can be expected in the nextnine to 12 months. This would provide an immediate positive trigger forthe stock. Overall, SIILs standalone copper operations are expected tomake a steady contribution to the groups overall profits, going forward,with expected revenue CAGR of 14.9% over FY09-12E to Rs 17563.7crore in FY12E. We expect the copper operations to deliver an EBITDA of

~Rs 917 crore in FY12E.

Exhibit 19:SIIL standalone financials(Rs Crore) FY08 FY09 FY10E FY11E FY12E

FY09-12E

CAGR (%)

Net Sales 12672.0 11566.0 13459.9 14028.1 17563.7 14.9

Adj. EBITDA 894.0 947.8 501.3 710.5 916.8 -1.1

Core EBITDA Margin (%) 7.1 8.2 3.7 5.1 5.2

PAT 951.6 1236.4 1177.6 1085.9 1267.8 0.8


Extremely strong balance sheet leaves

opportunity for inorganic growth


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Sterlite Aluminium operations Creating unmatchable scale

Massive expansion at most competitive costsSIIL is in the process of massive aluminium capacity build-up throughexpansion and debottlenecking activities at its subsidiary, Balco andassociate company, VAL (29.5% stake of SIIL). The expansion activities

would result in increasing SIILs capacities in alumina, aluminium andcaptive power by 173%, 175% and 194% respectively from current levelsand are expected to be completed by the end of FY12E. The expansioncosts being incurred by SIIL are very competitive and substantially lowerthan global average on account of strategic location and scale resulting inlower overall capex for the company.

Exhibit 20:Massive aluminium capacity build up

200 345810

1400

41390 27

375111

675 199 613 456

1036325

1200

3000

8851375

406

2520

743

885731

2005

600

177

50177

65

210 62

1550

0

1000

2000

3000

4000

5000

Alumina

Aluminium

Power

Alumina-Total

Alumina-SIIL*

Power-Total

Power-SIIL*

Aluminium-Total

Aluminium-SIIL*

Power-Total

Power-SIIL*

Alumina

Aluminium

Power

Operational Expansion Debottlenecking

BALCO VAL-Lanjigarh VAL-Jharsuguda Total Capacity - SIIL

1675

1251

3041

* Attributable to Sterlite from VAL, Alumina and aluminium capacity in Kilo tonne (KT), power in MW


Exhibit 21:Advantage through lower expansion costs

Projects

CAPEX (US$

mn)

New Capacity

(Work in

progress)

Average unit

cost ($/t)

Global

Average ($/t)

Cost Advantage

(%)

Alumina 1720 3600 kt 480.0 1200 60.0

Aluminium 3800 1575 kt 2400 4500 46.7

Captive Power 2000 2415 MW 830/KW 1200/KW 30.8 Source: Company, ICICIdirect.com Research

The expansion plan costs are substantially lower across all levels of

product integration and SIIL is set to realise a cost advantage of ~30-60%as compared to the global average for its capex in aluminium capacityenhancements at Balco and VAL.

FY12E (Rs Cr)5643.9

33913.7

Copper SIIL-OthersAluminium

Aluminium operations revenue contributionin SIILs total earnings

Aluminium expansion being

done at an enormous scale and

at most competitive costs

globally


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Balco Powerful combination of growth and flexibilitySIILs subsidiary, Balco operates two aluminium smelters, Balco I with aproduction capacity of 100 ktpa (VSS technology) and Balco II with aproduction capacity of 245 ktpa (GAMI technology), alumina refinery witha capacity of 200 ktpa and two captive power plants with a capacity of810 MW at its Korba facility in Chhattisgarh. The Balco operations are

currently undergoing brownfield expansion with the setting up of a newsmelter, Balco III having a capacity of 325 ktpa and associated captivepower plant of 1200 MW.

Exhibit 22:Balco aluminium operations capacity break-up

100

325200

245

810

1200

0

200

400

600

800

1000

1200

1400

BALCO I BALCO II BALCO III Alumina Captive Power

(MW)

(Inktpa)

Shutdown Operational Expansion


Balcos power generation cost/unit through captive power plants stands

at a meagre Rs 1.6/unit. It provides the company with flexibility to sellsurplus power and temporarily close any of its aluminium smelters whenprice of aluminium in global markets fall below its cost of production. Thecompany is currently not operating its Balco I plant, which has high costof production and is selling surplus power in the open market.Meanwhile, with captive power and operational improvements, cost ofproduction at Balco II is getting reduced on a constant basis.

Exhibit 23:Balco II cost of production reducing continuously

2100

130013471452

17961674

2625

2868

16561603

600

1100

1600

2100

2600

3100

FY08 H1FY09 H2FY09 H1FY10 FY11E

(InUS$/tonne)

BALCO II COP Aluminuim LME average price

Source: Company, Bloomberg, ICICIdirect.com Research

Aluminium operations per share contribution (Rs)

137.6

780.3

Copper SIIL-OthersAluminium

Balco has displayed flexibility by shiftingfocus to selling captive power and reducing

costs


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Sales of surplus power to continueBalco I is presently in the shutdown mode since June 5, 2009, whenaluminium prices were hovering below US$1500/tonne, and surpluspower from the captive power plants is being sold to the grids and onmerchant basis. The company has indicated that it is able to sell thesurplus power from Balco at an average rate of ~Rs 4.5-4.8/unit. Balco II

is an efficient smelter with technological advantage (based on GAMItechnology of China) and economies of scale and has lower cost ofproduction as compared to Balco I. The H1FY10 cost of production forBalco II stood at US$1347/tonne.

The management has indicated that Balco I would remain shutdowndespite the recent surge in aluminium prices. We believe that it stillremains prudent to keep Balco I shut as there are significant costsassociated with frequent mothballing and re-starting of operations. Weexpect average realisations from power sales at Balco to be at Rs 4/unit inFY11E and decline to Rs 3.5/unit in FY12E as some portion of the poweris sold to the grids apart from merchant sales. We expect power

revenues to be ~22% of overall revenue in Balco in FY12E.

The aluminium sales quantity is expected to jump significantly in FY12E(up 60% YoY) due to commissioning of new aluminium smelter of 3.25ktpa in BALCO III. Though the company has indicated towards first metaltapping from October 2010, we expect the smelter to commissionprogressively from Q4FY11E and stabilise from Q1FY12E only.

Exhibit 24:Assumptions-BalcoParticulars Unit FY08 FY09 FY10E FY11E FY12E

Aluminium Sales Qty Tonne 358328.0 356513.0 260948.0 247000.0 400687.5

LME aluminium price US$/tonne 2624.6 2238.0 1851.0 2100.0 2247.0

Power Sales Cr Units 137.4 189.0 351.9

Avg. Realisation/unit Rs 4.3 4.0 3.5

Aluminium Sales Revenue Rs Cr 4169.6 3933.6 2571.7 2556.5 4412.2

Power Sales Revenue Rs Cr 595.7 756.0 1231.7

Power revenue % share % 18.8 22.8 21.8


Margins to improve going forwardWe expect core EBITDA margins at Balco to reach ~46% by FY12E onthe back of i) robust aluminium realisations, ii) reduction in COP of BalcoII and iii) increase in power sales and up-tick in aluminium volumes from

the new smelter and captive power plant. We expect CAGR of ~50% and47% during FY09-12E in EBITDA and PAT respectively at Balcooperations.

Exhibit 25:Balco Financials(Rs Crore) FY08 FY09 FY10E FY11E FY12E

FY09-12E

CAGR (%)

Net Sales 4169.6 3933.6 3167.3 3312.5 5643.9 12.8

Core EBITDA 1327.4 766.2 1110.6 1379.5 2576.3 49.8

Core EBIT 837.2 381.6 727.1 1009.4 2085.2 76.1

Core EBITDA Margins (%) 31.8 19.5 35.1 41.6 45.6

Net Profits 678.2 517.4 609.9 792.5 1653.4 47.3


Inefficient Balco I to remain shutdown

resulting in continuous surplus power sales

from the captive power plant


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VAL Set to emerge as a real gemSIIL holds 29.5% stake in its parent company Vedanta Resourcesaluminium unit in India, Vedanta Aluminium Limited (VAL). VAL hasoperational capacities of 1.4 mtpa in alumina and 2.5 lakh tpa inaluminium metal apart from 945 MW of operational captive power plants.It is currently undergoing massive expansion in line with the strategy of

Vedanta to be among the top five global aluminium producers in theworld. With expected lower capital costs for set-up and very efficient coststructure post stabilisation (featuring among the lowest cost quartilesglobally) due to expected availability of captive bauxite and alumina, weexpect VAL to emerge as a real gem for SIIL. We expect it to make asignificant contribution to the bottomline of SIIL, going forward,particularly from FY12E onwards.

Exhibit 26:VAL aluminium operations

250

1035

1400 4801500

3000

50

600

15151800

5000

0

1000

2000

3000

4000

5000

6000Operational Expansion De-bottlenecking Total (By FY12E)

Alumina (ktpa) Aluminium (ktpa) Captive Power (MW)


Value accretive assets to make VAL most cost competitive aluminiumproducer globallyVALs existing and forthcoming assets are expected to be in the lowestcost quartile (by FY12E) of the global cost curve in the production of bothalumina and aluminium post the starting of captive bauxite feed from

Niyamgiri hills (nine bauxite mines with reserves of ~70 MT, scalable upto ~150 MT) and stabilisation of captive power plants. On the one hand,the company is expected to enjoy the benefits of captive resources. Onthe other hand, it is expected to have a significant advantage in terms oflogistics cost due to better transport arrangements between mines andrefinery as well as strategic location of its plant in Orissa. Also, we believethat better management practices and focus on operational excellencedue to its rich experience in metals space would help the company toachieve higher operational efficiencies. We expect the completestabilisation of VALs operations by FY12-13E and expect it to bepositioned as the most cost competitive aluminium producer globally.

VAL expected to be the most cost efficient

integrated aluminium producer globally in a

few years time


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VAL has set its aim of achieving cost of production of US$120/tonne foralumina and US$900/tonne for aluminium post starting of captivebauxite feed and stabilisation of all announced projects especially captivepower plants. There have been some delays in the starting of captivebauxite mines at Niyamgiri hills due to delays in regulatory approvals andresistance from foreign NGOs at the project site, etc. Though a lot of

work still remains to be done on the ground related to successful settingup of all announced projects we believe Vedanta would be able toachieve its target capacities and cost of production at VAL by FY12E andemerge as the most cost competitive integrated aluminium producerglobally. We expect captive bauxite feed for VAL to start from FY12Econsidering the present progress on the matter and previous delays.

Healthy ROCE at 10 year average alumina and aluminium pricesVAL is expected to post healthy ROCE of 29.6% and 23.8% in aluminaand aluminium operations, respectively, at last 10 years average prices(which we believe are close to long term sustainable prices) due to lowercapital costs (40-50% lower than global average), strategic plant locationand integrated set-up providing operational efficiencies and captiveresource feed (bauxite and coal) lowering raw material costs significantly.

Exhibit 27:VALs expected ROCE in alumina

Particulars (US$/tonne)

10 Year

Average

10 Year

Low

10 year

High

Contract

alumina

price 2009

Long term

alumina price

Alumina Price Assumption 303 148 468 230 275

Target COP (Vedanta) 120 120 120 120 120

Sustainable COP (Our Assumption)* 137 137 137 137 137

Core EBITDA 166 11 331 93 138

CAPEX per tonne 480 480 480 480 480

Depreciation 24 24 24 24 24

EBIT 142 -13 307 69 114ROCE (%) 29.6% -2.7% 64.0% 14.4% 23.8%


Exhibit 28:VALs expected ROCE in aluminiumParticulars (US$/tonne)

10 Year

Average

10 Year

Low

10 year

High

Marginal

COP

Long term

aluminium price

Aluminium Price Assumption 1839 1349 2640 1680 1850

Target COP (Vedanta) 900 900 900 900 900

Sustainable COP (Our Assumption)* 1147 1147 1147 1147 1147

Core EBITDA 692 202 1493 533 703

CAPEX per tonne 2400 2400 2400 2400 2400Depreciation 120 120 120 120 120

EBIT 572 82 1373 413 583

ROCE (%) 23.8% 3.4% 57.2% 17.2% 24.3%


Though Vedanta has targeted the COP of alumina and aluminium atUS$120/tonne and US$900/tonne, respectively, we expect the long termsustainable COP to be higher at US137/tonne and US$1147/tonne foralumina and aluminium, respectively, at VAL. Even at our assumption ofhigher sustainable COP and 10 year low prices, VAL is expected to post a

positive ROCE in aluminium. This, in turn, confirms the inherent strengthof existing and upcoming operations and our view that VALs assetswould be value accretive in the long term.

Starting of captive bauxite feed from

Niyamgiri mines remains a key trigger for

VAL and SIIL


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Profitability to jump in FY12E with access to captive bauxiteWe expect net sales and EBITDA to clock a CAGR of ~95% and ~203%during F10E-12E in VAL due to increase in sales volume of alumina(FY10-12E CAGR~50%) and aluminium (FY10-12E CAGR~85%) androbust realisations. We expect LME aluminium prices of US$2100/tonnefor FY11E. We expect captive bauxite from Niyamgiri hills to start flowing

in progressively from Q1FY12E (against management expectation ofQ3FY11E) and result in drastic improvement in VALs profitability andalso increase production & sales volumes of both alumina and aluminiumin FY12E.

Exhibit 29:Financials & Assumptions (VAL)Financials (Rs Crore) FY10E FY11E FY12E

FY10-12E

CAGR (%)

Net Sales 3008.5 6007.5 11497.2 95.5

Core EBITDA 460.6 1423.1 4219.9 202.7

Core EBITDA Margins (%) 15.3 23.7 36.7

Assumptions ('000 tonne)

Aluminium Sales Qty 280.5 528.1 956.3 84.6LME aluminium price (US$/t) 1876.0 2100.0 2247.0 9.4

Alumina Sales Qty 239.0 343.8 537.5 50.0


Exhibit 30:Aluminium COP at VAL

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Captive Bauxite & Power Non-Captive Bauxite &

Captive Power

Captive Bauxite & SEL

power*

Non-Captive Bauxite &

SEL power*

(InUS$/tonne)

Alumina CP Coke CT Pitch & Others Power Overheads (Incl. Emp Costs)

1147

1327

1551

1731

* Power transfer from SEL to VAL is assumed at Rs 2.7/unit



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Sterlite Zinc operations (HZL) The real cash cow

Capacity build up of integrated operations continues

SIILs purchase of 64.5% stake in HZL in April 2002 has led to significantoperational improvements with an impressive build up in production

capacity (zinc capacity up three fold) through commissioning of newsmelters and captive power plants, increase in mining activities at captivemines and debottlenecking.

Exhibit 31:Capacity build up - HZL

169

3570

0

669

85120

314

879

185

500 474

0

200

400

600

800

1000

Zinc ('000 t) Lead ('000 t) Silver (t)* Captive Power (MW)

2002 2009 2010

* Silver capacity ramp up to 500 tonne in 2012E


Capacity expansion is in progress continuously at HZL and total zinc-leadcapacity is expected to reach 1064 ktpa by mid 2010. HZL is augmentingzinc capacity by 210 ktpa and lead by 100 ktpa through the setting up of anew smelting capacity at Dariba. The project is on track to go onstreamas per the target timeline of mid 2010.

Exhibit 32:Capacity expansion - HZL

669

879

185100

85

210

400

500

600

700

800

900

1000

1100

1200

Current Capacity Zinc Expansion Lead Expansion 2010 Capacity

(Inktpa)

Zinc Lead

754

1064


Zinc operations revenue contribution inSIILs total earnings

FY12E (Rs Cr)

11087.2

28470.5

Copper SIIL-OthersZinc

475.5

442.3

Copper SIIL-OthersZinc

Zinc operations per share contribution (Rs)

Capacity expansion at HZL nearing

completion


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HZL to be the largest integrated zinc-lead player in the worldHZL is on course to become the largest integrated zinc-lead player in theworld in 2010 overtaking global metal major Xstrata AG after completingits ongoing expansion plans leading to commissioning of new zinc andlead smelters at Dariba.

Exhibit 33:Worlds leading zinc-lead producers

754

1002

490

380

322

310

0 200 400 600 800 1000 1200

Hindustan Zinc

Xstrata AG

Glencore

Teck Cominco

New Boliden

(In ktpa)

Under Expansion

1064


Ever increasing reserves & resources

HZL has continuously engaged itself in aggressive drilling andexploration activities over the past few years. This has resulted in asuccessful increase in its reserves and resources. The company had a

gross addition of 46.3 MT to reserves and resources prior to depletion of6.7 MT in FY09. Total reserves and resources stood at ~270 MT at theend of FY09. The metal contained in HZLs mines (as on March 31, 2009)is more than 25 MT for zinc and 6 MT for lead. This translates into aremaining operational life of more than 20 years at expanded capacity of1 million tpa if successfully recovered.

Exhibit 34:Reserves & resources HZL (March 31, 2009)

Mine

Measured &

Indicated (MT)

Zinc

grade

%

Lead

grade

%

Inferred

(MT)

Zinc

grade

%

Lead

grade

%

Proved &

probable

reserves (MT)

Zinc

grade %

Lead

grade

% Zinc (MT) Lead (MT)Rampura Agucha 31.33 16.21 2.25 19.55 14.06 1.41 67.88 13.36 1.87 16.90 2.25

Sindesar Khurd 18.23 6.09 3.92 31.99 4.57 3.05 6.39 5.31 2.76 2.91 1.87

Rajpura Dariba 5.73 8.27 2.55 13.66 6.47 1.32 7.38 6.26 1.56 1.82 0.44

Zawar 23.86 5.04 1.78 24.67 4.31 2.71 7.25 3.76 2.05 2.54 1.24

Kayar 2.3 12.58 1.87 6.71 9.95 1.67 0.96 0.16

Bamnai Kalan 1.69 5.29 1.84 3.37 5 3.8 0.26 0.16

Total 83.14 9.92 2.48 99.95 7 2.34 88.9 11.41 1.92 25.38 6.11

Resources Reserves Total Metal


HZL has remaining operational life of more than

20 years with mining reserves of ~270 MT


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Low cost of production ensures high profitability

Though the threat of significant price correction looms in zinc and leaddue to increasing surplus, HZL remains largely unaffected by the samedue to its very low COP and can keep on operating at full productionlevels. The low cost structure of HZL ensures sustainable margins for thecompany even in commodity price correction cycles and very high

margins during price up cycles.

Exhibit 35:Reducing cost of productionParticulars - HZL (Rs Crore) 2007 2008 2009

Segment sales 8,596.3 7,822.2 5,572.4

Less: 0.0 0.0 0.0

Segment profit -6,512.9 -5,556.3 -2,777.7

Segment cost 2,083.4 2,265.9 2,794.7

Less: 0.0 0.0 0.0

Cost of tolling including raw material cost -1.4 0.0 -40.9

Cost of intermediary product sold -248.7 -294.4 -130.1

By-product net sales -122.3 -263.7 -484.8

Cost of lead metal sold -146.3 -178.7 -207.9

Others, net -205.0 -11.8 -131.2

Total expenses 1,359.8 1,517.3 1,799.8

Production output (in tons) 348,316 426,323 551,724

Cost of production (per ton) USD/tonne 862 884 710

USD/INR avg. exchange rate 45.29 40.24 45.91

Cost of Production (Rs/tonne) 39,039.98 35,572.16 32,596.10

% Reduction -8.9% -8.4%


HZL has been successful in reducing its COP due to operationalefficiencies and economies of scale. Though COP in H1FY10 went upslightly to US$ 782/tonne due to weak by-product realisations, thecompany aims to achieve a COP below US$ 600/tonne by FY12E,reinforcing its position as one of the lowest cost quartile zinc-leadmanufacturer in the world.

Exhibit 36:EBITDA margin comparison

0%

10%

20%

30%

40%

50%

60%

70%

Nyrstar Korea Zinc Boliden Xstrata HZL

(EBITDAMargin%)

CY08/FY09 CY10E/FY11E CY11E/FY12E

Way above global

peers in profitability

Integrated PlayersCustom Smelters

Source: Bloomberg, ICICIdirect.com Research

Constant reductions in cost of production

with 8.4% YoY drop achieved in FY09

HZL is able to maintain above 50% EBITDA

margin even at low zinc prices whereas

global peers lag far behind


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High free cash flow generation virtually guaranteed

High free cash flow generation is virtually guaranteed at HZL due to itslow cost of operations (Q3FY10 COP~US$670/tonne) and consistent highoperating margin. The company was successful in garnering ~30%EBITDA margin at average zinc realisations of below US$1200/tonneduring Q3FY09. This has confirmed its ability to generate strong free cash flow from operations even at depressed zinc prices during commoditydown cycles. We expect the company to generate ~Rs 5900 crore in freecash flow over FY10-11E despite a substantial Capex (~Rs 2400 crore)lined up for completion of expansion activities.

Exhibit 37:Robust cash flow generation

2807

48604256

-1317

-2400

-800

1490

2460

3456

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

FY09 FY10E FY11E

(InRscro

re))

Operating Cash Flow CAPEX Free Cash Flow


Increasing silver sales provide the silver lining

HZL is currently the largest primary silver producer in India withproduction of 105 tonne in FY09. Silver production is expected to rise to500 tpa by 2012E in phases on the back of major additions coming fromSindesar Khurd mine expansion to 1.5 mtpa having high silver content of~215 ppm.

Exhibit 38:Silver production and revenue

80 105

500

1250

209158

0

100

200

300

400

500

600

FY08 FY09 FY13E

(Intonne)

0

200

400

600

800

1000

1200

1400

(InRscrore))

Production - L.H.S Revenue - R.H.S

Silver revenue too up 5 fold in 3-

4 years


Robust free cash flow to be generated

continuously due to low cost

operations and firm product prices

Silver volumes would increase to 500 tpa

by CY12E/FY13E with ramp up at

Sindesar Khurd mine


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2 3 | P a g e

The company is also in the process of implementing a new silver refinerywith a capacity of 350 tpa by 2010 as part of its lead smelting expansionto augment its silver production capacity and is expected to derive ~Rs1250 crore (assuming Rs 25000/kg silver realisation) of revenue fromsilver sales in FY13E at very little incremental costs due to silver beingrecovered from mining activities for zinc and lead. This would

significantly enhance the segment profits of HZL. Also, with 75% ofIndias annual demand of 3200 tonne of silver being met through importscurrently, HZL finds itself in a unique position to benefit from the increasein silver production and sales, going forward.

HZL to be the highest contributor to SIILs PAT

HZL is set to achieve revenue CAGR of ~25% over FY09-12E with netsales growing from Rs 5680.3 crore to Rs 11087.2 crore on the back of firm product prices (FY09-12E CAGR of 14.4% and 10.6% for zinc andlead respectively) and increase in volumes (FY09-12E CAGR of 9.5% and29.1% for zinc and lead respectively). We expect average LME zinc andlead prices of US$ 2200/tonne and US$2100/tonne in FY11E respectively.

We expect adjusted EBITDA (excluding interest income) CAGR of ~34%over FY09-12E on the back of capacity expansion, cost reduction androbust product realisations. The core EBITDA margins are expected toimprove to ~62% in FY12E from 50.6% in FY09. We expect HZL to be theprincipal contributor to SIILs EBITDA and PAT and make a contribution of~9000 crore to SIILs bottom-line during FY10-12E based on SIILsholding of 64.9% in HZL.

Exhibit 39: HZL earnings to soar(In Rs Crore) FY08 FY09 FY10E FY11E FY12E

CAGR

FY09-12E (%)

Net Sales 7877.8 5680.3 7655.1 8700.7 11087.2 25.0

Adj. EBITDA 5608.8 2874.3 4545.9 5229.9 6857.6 33.6Core EBITDA Margin(%) 71.2 50.6 59.4 60.1 61.9

PAT 4396.1 2727.6 3852.1 4287.9 5582.9 27.0

Contribution of HZL to SIIL's

PAT 2853.0 1770.2 2500.0 2782.9 3623.3 27.0


Exhibit 40:Assumptions - HZLAssumptions FY08 FY09 FY10E FY11E FY12E

CAGR

FY09-12E (%)

Zinc Sales Volume (tonne) 425532 552330 576916 633300 725175 9.5

Lead Sales Volume (tonne) 58298 60564 64540 83212.5 130275 29.1

LME Zinc price (US$/tonne) 3003 1572 1958 2200 2354 14.4

LME Lead price (US$/tonne) 2877 1663 1990 2100 2247 10.6


Note: For more details on HZL, please refer our initiating coverage andlatest result update reports on HZL.
http://www.icicidirect.com/mailimages/ICICIdirect_HindustanZinc_InitiatingCoverage.pdfhttp://content.icicidirect.com/mailimages/ICICIdirect_HindustanZinc_Q3FY10.pdfhttp://content.icicidirect.com/mailimages/ICICIdirect_HindustanZinc_Q3FY10.pdfhttp://www.icicidirect.com/mailimages/ICICIdirect_HindustanZinc_InitiatingCoverage.pdf


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Commercial Energy (SEL)* Powerful foray into Power

Operations to kick-start soon

SIIL is set to enter into the commercial power generation businessthrough its subsidiary, SEL which was floated by SIIL in October 2006, inorder to leverage on SIILs expertise in building and managing captivepower plants and enter into merchant power business which offers hugepotential in India on a long term basis. The company is currently buildingtwo thermal power plants with a combined proposed installed capacity of4380 MW. SELs sub-critical thermal power plant, with a powergeneration capacity of 2400 MW (comprising four units of 600 MW) atJharsuguda, Orissa is nearing completion with commissioning of its firstunit of 600 MW expected in Q4FY10E.

Exhibit 41:SEL power plant commissioning schedule

600

600

600

600 2400

1980 4380

0

500

1000

1500

2000

2500

3000

3500

40004500

5000

(In

MW)

Q4FY10 Q1FY11 Q2FY11 Q3FY11 Jharusguda -Total 2014 Total - SEL

Jharsuguda Talwandi Sabo


The company expects to completely commission the Jharsuguda powerplant by Q3FY11 at a total cost of ~RS 8200 crore. Apart from this, thecompany has been awarded the tender to build a 1980 MW super criticalthermal power plant near Talwandi Sabo, Punjab by the government ofPunjab, which is expected to be commissioned in 2014. The estimatedcost of this project is Rs 9320 crore. SEL intends to sell the powergenerated from these projects under a combination of long-term andshort term PPAs to industrial consumers and state owned utilitycompanies and on merchant basis. The company has already enteredinto long-term PPA with GRIDCO, granting GRIDCO the right to purchase~718 MW from the Jharsuguda power project over a period of 25 years.For its Talwandi Sabo power project, the company has entered into along-term PPA with the PSEB, pursuant to which PSEB has agreed topurchase ~1840 MW of power from this project.

*Please see the disclosure regarding SEL in the disclaimer on the lastpage

Commissioning of power plants expected to

kick-off from CY10E


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2 5 | P a g e

Exhibit 42:Overview of SEL commercial power business

Source: SEL DRHP, ICICIdirect.com Research


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2 6 | P a g e

SEL looking to raise money through IPO

SEL has filed its DRHP for garnering money from the primary marketthrough its IPO in order to part finance the construction and developmentof its power projects. The company plans to fund its total capex for thetwo power plants in a debt-equity ratio of 70:30. It has spent a total of Rs

4957.7 crore as on October 6 2009 and intends to deploy Rs 4068.7 crore from the IPO proceeds for the balance capex required for the projects.The balance amount of Rs 8493.6 crore is proposed to be spent byraising long-term loans, out of which the company has already made firmarrangements for more than 75% of the required amount throughsanctions of debt from leading banks.

Exhibit 43:Means of FinanceParticulars Amount (Rs Crore)

Aggregate cost of the identified projects 17520.0

-- Expenditure incurred as of Oct 6,2009 4957.7

-- Amount proposed to be financed from the net proceeds 4068.7

-- Balance amount proposed to be financed from loans 8493.6

Arrangements regarding 75% of the funds excluding the net procceds 6370.2

-- Sanctioned debt for the Jharsuguda power project 4944.3

-- SBI loan sanction for Talwandi power project 1800.0

-- Total 6744.3 Source: SEL DRHP, ICICIdirect.com Research

Exhibit 44:Debt-Equity mix in capex (Rs Crore)Particulars Jharsuguda Talwandi Sabo

Project Cost 8200.0 9320.0

Capacity (MW) 2400.0 1980.0

Project Funding

Debt:Equity 30:70 30:70

Equity Required 2460.0 2796.0

Invested by Sterlite 829.6 357.7

Investment proposed through

Sterlite Energy IPO 1630.4 2438.3

Debt Required 5740.0 6524.0

Debt financing agreements

- Rupee Loans 5569.0 2500.0

- Foreign currency loans 600.0

Debt drawn and Invested 1205.0

Total amount Invested (As on Oct

6,2009) 4106.3 851.4 Source: SEL DRHP, ICICIdirect.com Research


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Capex break-up and project progress

Exhibit 45:Project cost break-upParticulars Jharsuguda Talwandi Sabo

Land & site development 50 362EPC Cost 5555 7420

Transmission Line 400

Railway Line 504 326

Water Line 125 37

Ash Pond 50

Township 75

Captive coal block development contribution 150

Preliminary and pre-operative expenses 147 105

Interest during construction period 707 868

Contingencies 296 52

Margin money for working capital 141 150

Total 8200 9320

Amount (Rs crore)


Exhibit 46:Project completion statusParticulars Jharsuguda Talwandi Sabo

Civil works Completed By Q1FY12

Technical and engineering Completed By Q3FY11

Manufacturing and delivery Completed By Q2FY13

Installation of equipment By Q3FY10 By Q2FY13

Trial Runs By Q4FY10 By Q4FY13

Commercial operation date By Q4FY10 By Q4FY13

* Expected commissioning schedule for Unit I

Expected Completion*



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2 8 | P a g e

Risks & concerns

Delay in capacity expansionSterlite is currently implementing huge capacity addition across all itsproduct categories through its subsidiary and associate companies. Anyinadvertent delay in execution of capacity expansion in any productcategory would have a negative impact on the earnings of the companyon account of lower-than-expected sales volumes.

Demand slowdown leading to oversupplyAny unexpected slowdown in demand from end-user industries couldlead to an increase in surplus across various base metals in the marketcreating a situation of oversupply. This would put pressure on prices andhurt the earnings of the company negatively.

Delay in starting of captive resource feedSIILs aluminium expansions profitability is largely dependent on startingof captive bauxite feed from the Niyamgiri hills bauxite mines. Thoughwe have built an additional delay in starting of captive bauxite feed (from

FY12E) but any further delay in starting of bauxite mines would hurt theprofitability of the company. Also, delay in coal linkages for captive andpower generation purposes can potentially hurt the robust earningprospects of the company on a group basis.

High sensitivity to LME pricesThe earnings of the company are highly sensitive to movement in LMEprices. Sharp drop in LME prices of base metal products like copper, zincand aluminium would result in a drop in operating income of the groupand affect the earnings and valuation of the company negatively.

Depreciation of dollar against the rupee

The earnings of the company are also sensitive to rupee movementagainst the US dollar as base metal prices are set by SIIL in INR in thedomestic market in relation to LME prices quoted in US dollar. Asignificant depreciation of the dollar against the rupee can potentially hurtthe earnings of the company.


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Financials

Sales CAGR of 23.2% over next three years

SIIL is set to achieve revenue CAGR of 23.2% over FY09-12E withconsolidated net sales growing from Rs 21144 crore in FY09 to Rs 39558crore in FY12E. FY09 proved to be a relatively challenging year for SIIL

with base metal prices plummeting due to the global commodityslowdown and financial crisis. With recovery in global economy andimproved liquidity situation, prices have recovered smartly from theirlows and we expect higher volumes across all products and higher LMEbase metal prices to drive revenue growth for SIIL.

Exhibit 47:Sales growth to enter top gear

24705

21144

24103

27668

39558

5000

15000

25000

35000

45000


(InRsCr)

-20

-10

0

10

20

30

40

50

60

(%)

Net Sales (L.H.S) YoY Growth (R.H.S)

Sales CAGR of 23.2%

during FY09-12E


Exhibit 48:Revenue mix

0

5000

10000

15000

20000

25000

30000

35000

40000


(InRsCr)

Copper Zinc Aluminium


Sales CAGR of 23.2% expected in FY09-12E on

the back of stable base metal prices and

increasing volumes


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Margins to improve gradually

SIIL enjoys robust EBITDA margins due to low cost of production acrossvarious base metal product categories, particularly zinc. We expectadjusted EBITDA (excluding interest & other income) CAGR of 37.4% overFY09-12E on the back of reducing costs and robust realizations across allbase metals operations that SIIL manages. The EBITDA margin is

expected to improve to 32.9% in FY12E from 23.7% in FY09.

Exhibit 49:EBITDA trend32.9

29.8

24.923.7

33.2

0

2000

4000

6000

8000

10000

12000

14000


(InRsCr)

15

20

25

30

35

(%)

Core EBITDA* EBITDA Margins

* Excluding other income and interest income on cash & mutual funds investments


Return ratios getting suppressed due to high capex

We expect the return ratios to remain muted for the next few years due tohuge capex resulting in increase in capital employed and higherdepreciation costs. Also, additional equity has been raised in FY10E forfunding the capex requirements, going forward. This is expected to keepreturn on net worth suppressed. We expect improvement in return ratiosin FY12E with increase in net profits after most of the expansion is on-stream across various products in SIIL portfolio.

Exhibit 50:Return ratios

33.0

18.411.910.8

14.8

28.0 19.0

14.113.716.4

62.9

44.0

32.531.636.3

0

10

20

30

40

50

60

70


(In%)

RONW ROCE ROIC



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Strong balance sheet leaves ample room for organic/inorganic growth

SIIL boasts of a strong consolidated balance sheet with debt-equity ratioof ~0.3 in FY09 and cash and equivalents exceeding Rs 25000 crore as ofQ3FY10 end. The company has recently raised US$2.1 billion through anADS issue (equity of US$1.6 billion) and convertible senior notes (debt of

US$500 million) and has prepared itself for funds allocation for variousexpansion activities, which are currently under way and also for anyattractive opportunity to grow inorganically in the near future.

We expect SIIL to maintain its balance sheet strength, going forward,despite a huge capex plan over FY10-12E. We expect debt-equity ratio tolow remain below 0.4 and cash and investments to soar to ~Rs 45000crore by end of FY12E.

Exhibit 51:SIIL consolidated balance sheet strength

0

10000

20000

30000

40000

50000

60000


(InRsCrore).

0.1

0.2

0.3

0.4

Net Worth Cash & Investments Debt Debt-Equity Ratio



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Valuations

We have valued Sterlite Industries on sum of the parts methodology. Wehave shifted our valuation basis to FY12E for Hindustan Zinc (existingcoverage) and valued HZL at 5.5x FY12E EV/EVIDTA. We have ascribedan EV/EBITDA multiple of 6.5x on FY12E earnings to SIILs superiorquality aluminium business in both Balco and VAL. Custom coppersmelting business has been valued at 6x FY12E EV/EBITDA by us andother businesses are valued on DCF basis. Based on the sum of the partsof all businesses, we have derived the target price of Rs 918 for the stock,providing 19% upside from current levels. We are initiating coverage onthe stock with a BUY rating.

SOTP based valuation of Rs 917.8/shareSterlite Industries is currently implementing a massive expansion planunder its various businesses and holding companies and is all set toemerge as a very strong base metal player by FY12E with close to amillion tonne attributable capacities across zinc, aluminium and copper.Impressive merchant power capacity set up would be an additional

trigger for growth. We believe the market is yet to factor in the completegrowth potential of the company and it remains attractive as compared toother diversified international base metal players as it enjoys bettermargins and return ratios on the back of its integrated lower costoperations. We ascribe a target price of Rs 918 per share for Sterlitebased on sum of the parts methodology.

Exhibit 52:EV/EBITDA valuation

Company

FY12E

EBITDA Methodology Multiple EV

Implied Equity

Value SIIL Stake

Attributable

Equity Value Value/Share

Hindustan Zinc 6857.6 EV/EBITDA 5.5 37716.8 57279.8 64.9% 37174.6 442.3

Standalone - Copper (Incl. Cash) 916.8 EV/EBITDA 6.0 5500.7 19320.5 100% 19320.5 229.9

BALCO 2576.3 EV/EBITDA 6.5 16745.8 14892.7 51% 7595.3 90.4

VAL 4219.9 EV/EBITDA 6.5 27429.6 13446.7 29.5% 3966.8 47.2

Others 108.0

Total 917.8 Source: Company, ICICIdirect.com Research

Our SOTP value comes to Rs 918 for SIIL, with

highest contribution from HZL (Rs 442)


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Exhibit 53:Global peers valuationCY10 CY11 CY10 CY11 CY10 CY11 CY10 CY11 CY10 CY11

Diversified

Xstrata 36.8 40.2 11.2 8.6 6.8 5.7 1.5 1.3 14.8 17.4

Rio Tinto 38.2 40.8 13.5 10.9 10.1 8.8 2.5 2.1 21.3 21.8

BHP Billition 44.8 49.8 20.0 14.2 9.8 7.4 4.8 3.9 25.0 29.7Teck Resources 45.0 47.0 17.7 13.4 9.2 7.7 1.6 1.4 9.9 9.9

Average 15.6 11.8 9.0 7.4 2.6 2.2 17.8 19.7

Copper

Freeport-Mcmoran 50.7 52.2 10.9 9.7 4.8 4.5 3.1 2.5 30.7 26.6

Grupo Mexico 44.5 52.0 22.6 12.7 10.1 6.4 3.7 3.5 18.3 25.5

Southern Copper 58.2 61.0 18.4 13.4 10.4 8.0 6.0 4.7 36.8 39.3

Jiangxi Copper 11.8 13.5 12.5 10.3 13.7 11.4 1.7 1.5 16.0 16.2

Average 16.1 11.5 9.8 7.6 3.6 3.1 25.5 26.9

Zinc&Lead

Boliden 21.5 21.0 8.7 8.7 5.2 5.2 1.4 1.3 18.5 16.8

Nyrstar 7.9 1.0 13.2 7.5 4.9 3.3 1.3 1.1 12.1 19.8

Korea Zinc 21.2 22.8 8.2 7.8 5.5 5.1 1.4 1.1 18.0 16.1Oz Minerals 58.3 60.6 12.4 10.6 5.2 4.7 1.2 1.1 9.9 9.9

Average 10.6 8.7 5.2 4.6 1.3 1.2 14.6 15.7

Aluminium

Alcoa 15.3 16.4 18.4 12.9 8.1 6.9 1.1 1.1 5.3 7.2

Chalco 19.1 20.7 25.0 16.0 14.9 11.8 1.9 1.7 7.7 10.2

Alumina 9.7 9.5 23.1 15.8 18.6 18.1 1.2 1.2 5.4 6.9

Norsk Hydro 9.3 11.5 24.2 12.7 8.2 6.0 1.1 1.0 4.9 8.4

Average 22.7 14.4 12.5 10.7 1.3 1.3 5.8 8.2

Sterlite Industries* 29.8 33.2 14.3 8.1 6.1 3.2 1.7 1.5 12.9 19.5

RONWEBITDA Margins P/E EV/EBITDA P/B

* Sterlite Estimates for FY11 & FY12 corresponding to global CY10 & CY11


Hindustan Zinc: EV/EBITDA based valuation of Rs 442.3/shareHZL is SIILs most attractive asset in the base metals space with its lowcost structure, huge captive reserves of zinc and lead ores and increasein volumes on the anvil through capacity addition. HZL generates strongfree cash flows and currently has ~Rs 10500 crore of cash on its books.We have valued the zinc business of HZL at 5.5x FY12E EV/EBITDA andarrived at a valuation of Rs 1355 per share for HZL. The correspondingequity value for SIIL worked out to be Rs 442.3 per share.

Standalone - Copper: EV/EBITDA based valuation of Rs 229.9/shareSterlite (standalone) copper operations are focussed mainly on customsmelting and generate returns based on the realised copper treatmentand refining charges (TC/RC). Its copper operations enjoy the lowlogistics and low smelting cost advantage but earnings also depend onby-product realisations, which in turn could surprise positively on theupside. We have valued the copper business at 6x FY12E EV/EBITDA andarrived at a valuation of Rs 229.9 per share factoring in large cash pile-upon the standalone books.


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Balco: EV/EBITDA based valuation of Rs 90.4/shareSIIL owns 51% stake in Balco which has two aluminium smelters withcaptive power. With the high cost smelter in permanent shutdown mode,the company is reaping the benefit of better margins from surplusmerchant power sales. The cost of production at the operational smelterhas reduced to US$1350/tonne in H1FY10 and is providing attractive

returns. With smelting and captive power capacity expected to increasethrough expansion, we expect significant value accretion for Sterlite. Wehave valued the aluminium business of Balco at 6.5x FY12E EV/EBITDAand arrived at a valuation of Rs 90.4 per share for SIIL.

VAL: EV/EBITDA based valuation of Rs 47.2/shareSIIL owns a minority stake of 29.5% in VAL that, in turn, is majorityowned by SIILs parent, Vedanta. VAL is currently under massiveexpansion and is expected to be the crown in Vedantas jewel in the nextfew years. Starting of captive bauxite feed remains a key trigger as costof production post the same is expected to fall considerably. We havevalued the aluminium business of VAL at 6.5x FY12E EV/EBITDA and

arrived at a valuation of Rs 47.2 per share for SIIL.

Minority Buyouts Upside remainsSIIL owns the call options to buy the government stakes of 49% in Balcoand 29.5% in HZL and has exercised the rights to both options. Thoughthe case is under arbitration due to various differences the companyexpects to successfully close the deal in the near future. We expect asharp upside in SIIL stock on confirmation of minority buyouts in Balcoand HZL. At present, we have not built any valuation upside in our target from minority buyouts of HZL and Balco and await any positiveannouncements in that regard.


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Tables & ratios (Consolidated Financials)

Exhibit 54:Profit & loss account (Rs Crore)FY08 FY09 FY10E FY11E FY12E

Net sales 24705.4 21144.2 24103.3 27667.6 39557.6

Growth (%) -14.4 14.0 14.8 43.0

Op. Expenditure 16847.0 16440.1 18333.2 19679.3 26837.3

EBITDA 8199.7 5008.3 6002.0 8243.4 13000.9

Growth (%) -38.9 19.8 37.3 57.7

Other Income 1221.0 1850.1 1500.0 1830.0 2310.0

Depreciation 594.9 700.7 703.5 1200.3 1492.5

EBIT 8825.7 6157.7 6798.6 8873.1 13818.5

Interest 305.1 397.3 314.6 831.8 938.3

PBT 8520.7 5760.4 6483.9 8041.3 12880.2

Growth (%) -32.4 12.6 24.0 60.2

Tax 2102.7 855.0 1166.9 1608.3 2576.0

Extraordinary Item 52.8 -55.3 297.0 0.0 0.0

Rep. PAT before MI 6365.2 4960.7 5020.0 6433.0 10304.1

Minority interest (MI) 1965.8 1420.7 1679.1 1881.9 2169.4Rep. PAT after MI 4399.4 3540.0 3341.0 4551.1 8134.7

Adjustments -119.1 0.0 0.0 0.0 0.0

Adj. Net Profit 4518.4 3540.0 3341.0 4551.1 8134.7

Growth (%) -21.7 -5.6 36.2 78.7


Exhibit 55:Balance sheet (Rs Crore)FY08 FY09 FY10E FY11E FY12E

Equity Capital 141.7 141.7 168.1 168.1 168.1

Preference capital 0.0 0.0 0.0 0.0 0.0

Reserves & Surplus 22184.1 25403.7 36097.9 40276.2 47744.7

Shareholder's Fund 22325.8 25545.4 36266.0 40444.3 47912.8

Minority Interest 5587.5 6854.6 8533.7 10415.6 12585.0

Secured Loans 1534.2 1720.1 2220.1 2720.1 2770.1

Unsecured Loans 3540.3 5293.4 10143.4 12643.4 13143.4

Deferred Tax Liability 1353.7 1407.6 1407.6 1407.6 1407.6

Source of Funds 34341.7 40821.3 58570.9 67631.2 77819.1

Gross Block 14563.7 15386.7 20574.2 27436.7 32261.7

Less: Acc. Depreciation 4918.4 5619.1 6322.6 7522.8 9015.3

Net Block 9645.3 9767.6 14251.7 19913.9 23246.4

Capital WIP 2461.3 6978.6 7991.1 8228.6 6453.6

Net Fixed Assets 12106.6 16746.2 22242.8 28142.5 29700.0

Investments 16294.1 16206.2 18300.2 20300.2 20300.2

Cash 2771.3 5943.0 15973.8 16988.4 24979.1

Trade Receivables 1562.3 876.0 1320.7 1516.0 2167.5

Loans & Advances 1467.7 2714.9 2410.3 2490.1 3164.6

Inventory 3334.1 2459.1 2762.5 2965.4 4044.0

Total Current Asset 9135.3 12074.1 22548.5 24041.0 34436.3

Current Liab. & Prov. 3194.3 4205.1 4520.5 4852.4 6617.4

Net Current Asset 5941.0 7869.0 18028.0 19188.6 27818.9

Application of funds 34341.7 40821.3 58570.9 67631.2 77819.1



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Exhibit 56:Cash flow statement (Rs Crore)FY08 FY09 FY10E FY11E FY12E

Profit after Tax 4518.4 3540.0 3341.0 4551.1 8134.7

Dividend 358.6 309.3 273.6 372.7 666.2

Depreciation 594.9 700.7 703.5 1200.3 1492.5

Cash Profit 7152.6 5252.5 5449.9 7260.6 11130.4

Inc./Dec. in Current Liab. -1669.3 1010.9 315.4 331.9 1765.0Inc./Dec. in Current Assets -1581.9 -232.9 443.6 477.9 2404.6

CF from operations 7065.2 6496.2 5321.6 7114.6 10490.7

Purchase of Fixed Assets 2983.9 5340.3 6200.0 7100.0 3050.0

Inc./Dec. in Investment 11072.1 -87.9 2094.0 2000.0 0.0

CF from Investing -13922.5 -5263.5 -8294.0 -9100.0 -3050.0

Inc./Dec. in Debt 464.2 1939.0 5350.0 3000.0 550.0

Inc./Dec. in Equity capital 8050.9 0.0 7653.2 0.0 0.0

CF from Financing 8515.1 1939.0 13003.2 3000.0 550.0

Opening Cash balance 1113.4 2771.3 5943.0 15973.8 16988.4

Closing Cash balance 2771.3 5943.0 15973.8 16988.4 24979.1


Exhibit 57:Key ratiosReturn ratios FY08 FY09 FY10E FY11E FY12E

RONW 28.0 14.8 10.8 11.9 18.4

ROCE 33.0 16.4 13.7 14.1 19.0

ROIC 62.9 36.3 31.6 32.5 44.0

DuPont ratio analysis

PAT/PBT 53.0 61.5 51.5 56.6 63.2

PBT/EBIT 96.5 93.5 95.4 90.6 93.2

EBIT/Net sales 35.7 29.1 28.2 32.1 34.9

Net Sales/ Total Asset 71.9 51.8 41.2 40.9 50.8

Total Asset/ Networth 153.8 159.8 161.5 167.2 162.4

Spread of RoIC over WACC

RoIC 62.9 36.3 31.6 32.5 44.0

WACC 11.0 11.0 11.0 11.0 11.0

EVA (Rs Crore) 7923.8 4719.7 5015.8 6517.2 10721.9

RoIC-WACC 51.9 25.3 20.6 21.5 33.0

Turnover ratios

Inventory turnover 72.2 54.6 55.0 55.0 55.0

Debtor turnover 23.1 15.1 20.0 20.0 20.0

Creditor turnover 69.2 93.4 90.0 90.0 90.0

Current Ratio 2.9 2.9 5.0 5.0 5.2

Quick ratio 0.9 1.4 3.5 3.5 3.8 Source: Company, ICICIdirect.com Research


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Exhibit 58:Profitability and per share dataProfitability ratios (%) FY08 FY09 FY10E FY11E FY12E

EBITDA Margin 33.2 23.7 24.9 29.8 32.9

PAT Margin 25.8 23.5 20.8 23.3 26.0

Per share data (Rs)

Revenue per share 348.7 298.4 286.8 329.2 470.7

EV per share 570.5 554.4 507.3 507.1 418.6Book Value 315.1 360.6 431.5 481.3 570.1

Cash per share (Incl. Invst.) 269.1 312.6 407.8 443.7 538.8

Attributable EPS 63.8 50.0 39.8 54.2 96.8

Dividend per share 4.0 3.5 2.8 3.8 6.8


Exhibit 59:Valuation ratiosValuation (x) FY08 FY09 FY10E FY11E FY12E

P/E 12.0 15.4 19.3 14.2 7.9

P/BV 2.4 2.1 1.8 1.6 1.3

EV/EBITDA 4.9 7.8 7.1 5.2 2.7

FCF Yield (%) 7.5 2.1 -1.4 0.0 11.5

EV/Sales 1.6 1.9 1.8 1.5 0.9

Div Yield (%) 0.5 0.5 0.4 0.5 0.9



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Annexure:

Industry overview Copper

Up tick in global copper consumption to gather paceGlobal copper production increased to 18.5 MT in 2008, an increase of

~2% over 2007. The major smelting locations include China (20.4%),Japan (10.7%), Chile (10.6%), Russia (5.2%) and India (4.8%), whichtogether accounted for 51.7% of the global production. Copperconsumption has remained flat at ~18 MT in 2008 due to drop inconsumption of copper in developed parts of the world, mainly WesternEurope, North America and Japan. The world copper market remained insurplus in 2007 and 2008. Copper consumption is expected to improve,going forward (2008-12E CAGR of 5.4%) on the back of overall economicrecovery across the globe.

Exhibit 60:Global refined copper production

15.2 15.716.6 17.3

18.0 18.5

20.722.1

15.4

0

4

8

12

16

20

24

28

2003 2004 2005 2006 2007 2008 10M2009 2010E 2012E

(Inmilliontonne)

-2%

0%

2%

4%

6%

Production YoY Growth %

008-12E CAGR 4.6%

Source: Bloomberg, Reuters brokers poll, company, ICICIdirect.com Research

Exhibit 61:Global refined copper consumption

15.2

16.5 17.017.5 17.9 18.0

15.2

19.5

22.2

2

6

10

14

18

22

26

2003 2004 2005 2006 2007 2008 10M2009 2010E 2012E

(Inmilliontonne)

-2%

0%

2%

4%

6%

8%

10%

Consumption YoY Growth %

008-12E CAGR 5.4%


India leads in copper consumption growth, trend to continue

Copper consumption is expected to grow at

a CAGR of 5.4% in 2008-12E on the back of

economic recovery


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The copper consumption pattern for the last four years shows a clear-cuttrend of robust growth in the Indian and Chinese market whereas adecrease in demand in developed markets have kept the overall worldcopper consumption growth subdued. Indian copper consumption hasgrown at a CAGR of 12.9% during 2005-08 whereas global copperconsumption has shown a CAGR of 1.9% in the same period asdeveloped countries have seen a CAGR drop in overall copper

consumption during 2005-08. Indias copper consumption growth isexpected to grow at ~8% CAGR (CY08-12E), well above global CAGR of5.4%.

Exhibit 62:Copper consumption trend(In '000 tonne) 2005 2006 2007 2008 2005-08 CAGR (%)

China 3815 3967 4600 5014 9.5%

India 415 458 568 598 12.9%

North America 2549 2408 2395 2200 -4.8%

Western Europe 3565 3923 3661 3413 -1.4%

World 16965 17493 17943 17963 1.9% Source: Bloomberg, ICICIdirect.com Research

Exhibit 63:Copper end-use pattern

11%

47%

18%

9%

20%

35%32%

10%11%12%

Construction

Electrical

Industrial

machinery

Transportation

equipment

Consumer

products

Global Share Indian Share


Exhibit 64:Copper per capita consumption trend[

9.4

6.6

3.8

2.7

0.5 0.7

0

1

23

4

5

6

7

8

9

10

Japan USA China World India India -

2012E

(InKgs)

20%

H12009 annualised

rowth rate


The end use pattern of copper shows that approximately one-third of

copper demand comes from the construction sector while industrialmachinery accounts for another 12% on a global level. However, in Indiait is used mainly in electrical and industrial machinery (total shareat~56%). Both electrical and industrial machinery usage continues togrow in India on account of huge infrastructure spend and industrialcapex. The per capita consumption of copper in India is very low at ~0.5kg. This indicates that there exists a huge scope for improvement in thesame when compared with China and the world, which have per capitaconsumption at 3.8 kg and 2.7 kg, respectively.

India has shown the best copper

consumption growth on a global

level during 2005-08

Copper consumption in India is expected toincrease


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Exhibit 65:China copper consumption and imports rising

0

100000

200000

300000

400000

500000

600000

700000

800000

Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09

(Intonne)

Production Consumption Imports

Chinese monthly copper consumption

and production gap still quite high


Exhibit 66:LME copper price and inventory

0

100000

200000

300000

400000

500000

600000

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10

(Intonne)

2000

3000

4000

5000

6000

7000

8000

9000

10000

(InUS$/tonne)

LME Copper Inventory (L.H.S) LME Copper Spot (R.H.S)

Increasing copper inventory

expected to keep prices in check


Exhibit 67:Average LME copper price and TC/RC movement

5178

6966

71246729

28693683

17791557157718141573

13.513.915.517.415.915.3

13

29.6

45.9

11.5

15.4

0

1000

2000

3000

4000

5000

6000

7000

8000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(US$/tonne)

0

5

10

15

20

25

30

35

40

45

50

(cents/lb)

LME Avg. Copper Price (L.H.S) TcRc (R.H.S)



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Industry Overview Aluminium

Aluminium demand to show smart recoveryGlobal aluminium production increased to 39.6 MT in 2008, an increaseof ~4% over 2007. The major aluminium producing countries include

China (33.3%), Russia (10.6%), Canada (7.9%), U.S (6.7%) and Australia(5%) which together accounted for 63.5% of global production in 2008.Aluminium consumption has remained flat at ~38 MT in 2008 due todrop in consumption in developed parts of the world, mainly WesternEurope, and North America. The world aluminium consumption isexpected to fall in 2009E but show a smart recovery and clock a CAGR of6.7% during 2008-12E on the back of demand revival resulting fromstimulus packages all over the World.

Exhibit 68:World aluminium production trend

28.029.9

32.033.9

38.139.6

30.4

43.7

50.2

10

15

20

25

30

35

40

45

50

55

2003 2004 2005 2006 2007 2008 10M2009 2010E 2012E

(InMilliontonne)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Production (L.H.S) YoY Growth % (R.H.S)

008-12E CAGR 6.1%


Exhibit 69:World aluminium consumption trend

27.630.0

31.934.4

38.0 38.0

28.8

49.3

40.7

10

15

20

25

30

35

40

45

50

55

2003 2004 2005 2006 2007 2008 10M2009 2010E 2012E

(InM

illiontonne)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Consumption (L.H.S) YoY Growth % (R.H.S)

008-12E CAGR 6.7%


Aluminium consumption expected to grow

at a CAGR of 6.7% for 2008-12E on the backof economic recovery


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India and China dominate aluminium demand growthAluminium consumption pattern for the last four years shows thatdemand from China and India has grown at a healthy CAGR but marketsin North America have shown a de-growth and Western Europe hasremain subdued. Indian aluminium consumption has grown at a CAGR of11.1% during 2005-08 whereas World consumption has shown a CAGR

of 6%. On the back of huge planned investments into power andconstruction sectors in India, aluminium demand is expected to grow at aCAGR of 6.6% in CY08-12E.

Exhibit 70:Aluminium consumption trend(In '000 tonne) 2005 2006 2007 2008

sterlite ind icicid 270110

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