Sterlite Industries ACCUMULATE. Performance Highlights CMP. `173 Target Price `196. 2QFY2011 Result Update Base Metals. Investment Period 12 months

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1 2QFY211 Result Update Base Metals October 27, 21 Sterlite Industries Performance Highlights Particulars (` cr) 2QFY211 2QFY21 % chg (yoy) 1QFY211 % chg (qoq) Net sales 6,29 6,85 (.9) 5, EBITDA 1,474 1, , EBITDA margin (%) bp 24.5 (6bp) Net profit 1, ,8 (.) Sterlite s 2QFY211 consolidated net revenue came in at `6,29cr, in line with our estimates of `5,863cr. However, net profit at `1,8cr was marginally lower than our estimates of `1,65cr. No major surprises, results largely in line: Sterlite reported flat top-line growth, as the positive impact of higher zinc-lead sales and increased realisations was negated by lower copper cathode production and power tariff. Sterlite sold 414mn units of merchant power (higher by 23.4% yoy), but power tariff was down by 15.4% yoy to `3.4/unit. On account of higher LME prices, EBITDA margin during the quarter grew by 272bp yoy to 24.4% despite cost increases witnessed in a) the zinc-lead segment (+21.1% yoy at US $977/tonne due to higher met coke, coal and stripping costs), b) the aluminium segment (+16% yoy at US $1,748/tonne due to alumina and coal costs) and c) lower TC/RC margins (down 18% to USc 11.8/lb). Consequently, EBITDA grew by 11.5% to `1,474cr. While other income grew by 76.6% yoy to `578cr, depreciation expenses grew by 22.5% yoy to `212cr. Further, Vedanta Aluminium (VAL) posted loss of `24.7cr in 2QFY211 v/s profit of `86.3cr in 2QFY21, leading to mere 5.1% yoy net profit growth to `1,8cr. Outlook and valuation: Sterlite is currently trading at 7.3x FY211E and 4.6x FY212E EV/EBITDA. We believe the company is well placed to capitalise on strong metal demand through its expansion plans in the zinc-lead segment, higher merchant power and silver sales. Moreover, the settlement of the Balco and Hindustan Zinc (HZL) call option could provide a further upside to our target price. However, we keenly wait for the revised capex plans of the company and the outcome of the ongoing Tuticorin s litigation. We maintain Accumulate on the stock with an SOTP-based Target Price of `196. Key financials (Consolidated) Y/E March (` cr) FY29 FY21 FY211E FY212E Net sales 21,144 24,41 27,64 34,36 % chg (14.4) Net profit 3,54 3,744 4,5 6,49 % chg (19.5) EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) ACCUMULATE CMP `173 Target Price `196 Investment Period 12 months Stock Info Sector Base Metals Market Cap (` cr) Beta 52 Week High / Low 58, /149 Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code 1 2,5 6,13 STRL.BO Bloomberg Code STLT@IN Shareholding Pattern (%) Promoters 52.8 MF / Banks / Indian Fls 8.3 FII / NRIs / OCBs 12.9 Indian Public / Others 26. Abs. (%) 3m 1yr 3yr Sensex Sterlite (1.7) (11.) (27.5) Paresh Jain Tel: Ext: 348 pareshn.jain@angelbroking.com Pooja Jain Tel: Ext: 311 pooja.j@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY211 performance (Consolidated) Y/E March (` cr) 2QFY11 2QFY1 % chg 1HFY11 1HFY1 % chg Net sales 6,29 6,85 (.9) 11,953 1, Consumption of raw material 2,771 3,262 (15.1) 5,449 5, (% of net sales) Power & fuel , (% of net sales) Staff costs (% of net sales) Other expenses ,94 1, (% of net sales) Total expenditure 4,555 4,764 (4.4) 9,28 8, (% of net sales) EBITDA 1,474 1, ,925 2, EBITDA margin (%) Interest* () Depreciation Other income + operating income , Exceptional items (21) (23) (21) (23) Profit before tax 1,874 1, ,75 2, (% of net sales) Tax (% of PBT) Profit after tax 1,418 1, ,881 2, Net income 1, ,16 1, ; Note: *Interest expense includes exchange gain of ` 71.5cr during the quarter Exhibit 2: 2QFY211 Actual v/s Angel estimates (` cr) Actual Estimates Variation (%) Net sales 6,29 5, EBITDA 1,474 1,539 (4.3) EBITDA margin (%) (181bp) PBT 1,874 1,869.2 Net profit 1,8 1,65 (5.4) October 27, 21 2

3 Key conference call takeaways Balco buyout in its last leg Management indicated that Balco s arbitration process is over and the final award from the arbitration panel is expected by November 21. Investment in VAL Management indicated that the total investment in VAL till date has been `26,7cr, of which `13,5cr is through external loan. Sterlite has contributed `6,2cr and the balance amount is provided by Vedanta Resources. Deferment of capex plans Gives an opportunity to sell power on merchant basis Sterlite has temporarily deferred its aluminium expansion at Jharsuguda, expansion of the Lanjigarh alumina refinery at VAL and Balco s aluminium expansion for the next months. As a result, the total capex deferred is US $1.5bn and management indicated that it is reworking on its capex plans. However, the deferment of capex plans will allow the company to sell power in the spot market. The commissioning of the first 3MW unit of the 1,2MW power plant at Balco is expected by March 211. Sterlite Energy s (SEL) 2,4MW power project SEL s first 6MW unit of the 2,4MW plant was synchronised in August 21 and is expected to start commercial production in 3QFY211E. The second unit of 6MW is expected to come on stream by 4QFY211E. Talwandi Sabo project During the quarter, Sterlite received an approval from Punjab Government for setting up another 66MW power plant in addition to the ongoing Talwandi Sabo project of 1,98MW (3x66MW). Management expects to sell 85% of power from this unit in the spot market. Tuticorin s copper operations In September 21, Sterlite s copper business at Tuticorin was asked to shut down by Madras High Court for violating environmental laws and causing pollution. However, the Supreme Court has extended the stay on the Madras High Court s order and the next hearing is likely to take place in mid-december. The captive power plant at Tuticorin is expected to be commissioned in 4QFY212E. While the MoEF clearance is received for the 4kt copper smelter expansion, the project is being rescheduled as the consent from the State Pollution Control Board is awaited. October 27, 21 3

4 2QFY211 result highlights Sterlite s consolidated net revenue came in flat at `6,29cr, as the positive impact of higher zinc-lead sales and increased realisations was negated by lower copper cathode production and power tariff. The company sold 414mn units (336mn units in 2QFY21) of merchant power during the quarter (higher by 23.4% yoy), but power tariff was down 15.4% yoy to `3.4/unit (`4.1/unit in 2QFY21). As a result, revenue from the power segment grew by mere 4.2% yoy to `143cr. On account of higher LME prices, EBITDA margin expanded by 272bp yoy to 24.4% despite cost increases witnessed in a) the zinc-lead segment (+21.1% yoy at US $977/tonne due to met coke, coal and stripping costs), b) the aluminium segment (+16% yoy at US $1,748 due to alumina and coal costs) and c) an 18% decline in TC/RC margins to USc 11.8/lb (USc 14.3/lb). Consequently, EBITDA grew by 11.5% to `1,474cr. While other income grew by 76.6% yoy to `578cr, depreciation expenses increased by 22.5% yoy to `212cr. Moreover, VAL reported a loss of `24.7cr in 2QFY211 v/s profit of `86.3cr in 2QFY21, which led to net profit growing by mere 5.1% yoy to `1,8cr. Segmental performance Copper segment affected by lower production During 2QFY211, copper cathode production was down by 25.8% yoy at 68, tonnes due to a planned maintenance shutdown at Tuticorin smelter. Mined metal from the Australian mine was 7,22 tonnes during the quarter. As a result, copper revenue declined by 15.3% yoy to `2,97cr despite LME prices increasing by 25.3% yoy. Moreover, higher acid realisations partly negated the impact of lower TC/RC margin, which declined to USc 11.8/lb (USc 14.3/lb). Consequently, EBIT margin improved to 5.4% as compared to 5.% in 2QFY21. Exhibit 3: Copper EBIT margin expanded by 42bp yoy (` cr) (%) 1QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 EBIT (LHS) EBIT margins (RHS) October 27, 21 4

5 Strong performance from the aluminium segment Balco s aluminium production was flat at 65, tonnes during the quarter, whereas production at VAL was up by 74.5% at 97, tonnes. The aluminium segment s revenue grew by 14.1% yoy to `718cr. Despite higher alumina and coal costs at Balco, EBIT margin increased to 17.5% in 2QFY211 as compared to 11.% in 2QFY21 on account of higher LME prices. Consequently, the aluminium segment s EBIT increased by 82.% yoy to `126cr. Exhibit 4: Aluminium EBIT margin higher at 17.5% (`cr) (%) 1QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY11 EBIT (LHS) EBIT margins (RHS) Zinc-lead segment aided by higher volumes and prices Revenue from the zinc-lead segment grew by 21.4% yoy to `2,146cr mainly on account of higher realisations and sales volume. During the quarter, the company s silver sales grew by 8.6% to 44,kg. However, EBIT margin fell to 46.7% yoy as compared to 56.1% on account of higher met coke, coal and stripping costs. Exhibit 5: EBIT margin affected by higher stripping cost (`cr) 1,6 1,4 1,2 1, QFY1 2QFY1 3QFY1 4QFY1 1QFY11 2QFY (%) EBIT (LHS) EBIT margins (RHS) October 27, 21 5

6 Investment rationale Zinc-lead expansion and power to aid growth: The 1ktpa lead smelter at Rajpura Dariba is expected to be commissioned by 3QFY211E. We believe the company is well poised to capitalise on strong metal demand as it expands its zinc-lead capacity to 1.1mn tonnes and silver capacity to 5ktpa. Although, the company has deferred its aluminium expansion, we believe it will benefit from increased merchant power sale from Balco and SEL, benefits of which are likely to be witnessed in FY212E. Balco and HZL minority stake buyout: Sterlite has been in the process of buying the minority stake in Balco and HZL. As indicated by management, Balco s arbitration is over and we believe the buyout process is likely to be completed by March 211. Moreover, management indicated that once Balco s case is settled, then HZL s case is likely to get decided along the lines of Balco. We believe any positive development on this front would provide further upside to our target price. Valuation Sterlite is currently trading at 7.3x and 4.6x FY211E and FY212E EV/EBITDA, respectively. We have revised our FY211E and FY212E estimates to factor in higher prices at LME, lower sales volume from capex deferment, higher zinc sales volume and other book-keeping changes. We maintain Accumulate on the stock with an SOTP-based Target Price of `196. Exhibit 6: Key assumptions Earlier Revised LME prices (US $/tonne) FY11E FY12E FY11E FY12E Aluminium 2,1 2,1 2,1 2,1 Copper 6,5 6,5 7,2 7,5 Zinc 1,975 2,5 2,1 2,15 Lead 1,925 2, 2,1 2,15 Silver (`/kg) 25,5 25,5 28,75 28,5 Sales volume (tonnes) Aluminium 297,6 496, 254, 26, Copper 348,75 348,75 348,75 348,75 Zinc metal 682,1 747,15 78,72 791,1 Lead metal 8,1 125,45 8,1 125,45 Silver (kg) 18, 27, 18, 27, Source: Company, Angel research October 27, 21 6

7 Exhibit 7: SOTP valuation Subsidiary Valuation method Target multiple (x) Equity value % Stake Sterlite's value (` cr) Value/share Sterlite standalone (including US $1.6bn raised) EV/EBIDTA ,6 1 18,6 54 Balco EV/EBIDTA 7. 8, , Vedanta Aluminium EV/EBIDTA 4. 6, ,918 6 Hindustan Zinc EV/EBIDTA 6. 56, , Sterlite Energy FCFE 1. 4,13 1 4,13 12 Tasmania copper mines P/BV 1. 1,9 1 1,9 3 Target price (`) 196 Source: Angel Research Exhibit 8: Change in estimates (` cr) Earlier estimates Revised estimates Upgrade/(downgrade) (%) FY11E FY12E FY11E FY12E FY11E FY12E Net sales 27,542 33,639 27,64 34,36 (1.7) 1.2 EBITDA 7,811 1,675 6,945 1,242 (11.1) (4.1) EBITDA margin (%) (27bp) (164bp) PBT 8,375 11,324 7,864 11,127 (6.1) (1.7) Net income 4,799 6,625 4,5 6,49 (6.2) (3.3) Net margin (%) (8bp) (86bp) Diluted EPS (`) (6.2) (3.3) Exhibit 9: EPS - Angel forecast vs. consensus Year (%) Angel forecast Bloomberg consensus Variation (%) FY11E (12.3) FY12E (15.8) Source: Bloomberg, Angel Research Exhibit 1: EV/EBITDA band 14, 12, (`cr) 1, 8, 6, 4, 2, Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 14x 11x 8x 5x 2x Source: Bloomberg, Angel Research October 27, 21 7

8 Exhibit 11: P/E band (`) x 15x 1x 5x Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Source: Bloomberg, Angel Research Exhibit 12: P/BV band (`) Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 3.5x 2.5x 1.5x.5x Source: Bloomberg, Angel Research Exhibit 13: Recommendation summary Company CMP Target Price Reco. Mcap Upside P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) (`) (`) (` cr) (%) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E SAIL Neutral 87, Tata Steel Accumulate 54, JSW Steel 1,278 - Neutral 32, Sesa Goa Neutral 29, NMDC Neutral 19, Hindalco Neutral 41, Nalco Sell 25,515 (2.2) Sterlite Accumulate 58, Hindustan Zinc Source: Angel Research 1,244 1,342 Accumulate 52, October 27, 21 8

9 Profit & Loss Statement (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E Gross sales 26,193 26,872 22,774 26,533 3,71 37,818 Less: Excise duty 1,86 2,167 1,629 2,123 3,7 3,782 Net Sales 24,387 24,75 21,144 24,41 27,64 34,36 Other operating income Total operating income 24,387 24,75 21,144 24,41 27,64 34,36 % chg (14.4) Total expenditure 14,928 16,837 16,44 18,339 2,12 23,794 Net raw materials 1,498 11,771 1,634 12,169 13,895 16,476 Other Mfg costs 3,881 4,47 5,5 5,316 5,142 5,956 Personnel ,83 1,361 Other EBITDA 9,459 7,868 4,74 6,72 6,945 1,242 % chg (16.8) (4.2) (% of net sales) Depreciation ,131 1,227 EBIT 8,655 7,273 4,3 5,322 5,814 9,15 % chg (16.) (45.) (% of net sales) Interest charges Other income 682 1,566 2,154 1,959 2,639 2,723 (% of PBT) Share in profit of associates Recurring PBT 8,958 8,521 5,76 6,939 7,864 11,127 % chg (4.9) (32.4) Extraordinary inc/(expense) (157) (53) 55 (297) - - PBT (reported) 8,8 8,468 5,816 6,642 7,864 11,127 Tax 2,473 2, ,233 1,73 2,448 (% of PBT) PAT (reported) 6,327 6,365 4,961 5,49 6,134 8,679 Add: Share of earnings of associate () (4) (154) 59 (1) (1) Less: Minority interest 1,94 1,962 1,267 1,724 1,533 2,17 Extraordinary expense/(inc.) Net Income 4,422 4,399 3,54 3,744 4,5 6,49 Adj. Net Income 4,536 4,439 3,493 3,986 4,5 6,49 % chg 17.3 (2.1) (21.3) (% of net sales) Basic EPS (`) Fully Diluted EPS (`) % chg (72.9) (22.9) (21.3) (3.8) October 27, 21 9

10 Balance Sheet (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E SOURCES OF FUNDS Equity share capital Reserves & surplus 9,87 22,161 26,628 39,225 43,199 48,858 Shareholders funds 9,982 22,33 26,77 39,393 43,367 49,26 Share warrants Minority interest 3,626 5,623 5,623 5,623 5,623 5,623 Total loans 4,61 5,75 7,75 1,575 13,75 13,575 Deferred tax liability 917 1,354 1,354 1,354 1,354 1,354 Total liabilities 19,135 34,354 4,822 56,944 63,418 69,578 APPLICATION OF FUNDS Gross block 12,641 14,564 17,64 2,564 23,564 25,564 Less: Acc. depreciation 4,324 4,588 5,289 6,39 7,17 8,397 Net block 8,318 9,975 11,775 14,525 16,394 17,167 Capital work-in-progress 1,4 2,461 3,961 5,461 6,461 7,461 Goodwill Investments 5,222 16,294 16,294 16,294 16,294 16,294 Current assets 9,59 1,663 13,861 25,949 29,763 34,679 Cash 1,113 2,454 5,883 17,375 2,658 24,375 Loans & advances 3,484 3,314 3,314 3,314 3,314 3,314 Other 4,462 4,896 4,665 5,261 5,792 6,99 Current liabilities 4,864 5,4 5,7 5,285 5,494 6,24 Net current assets 4,196 5,623 8,792 2,664 24,269 28,656 Mis. exp. not written off Total assets 19,135 34,354 4,822 56,944 63,418 69,578 October 27, 21 1

11 Cash Flow Statement (Consolidated) Y/E March (` cr) FY27 FY28 FY29 FY21 FY211E FY212E Profit before tax 8,8 8,468 5,816 6,642 7,864 11,127 Depreciation ,131 1,227 Change in working capital (1,567) (87) 261 (38) (322) (669) Less: Other income (1,95) (1,966) (1,421) (1,665) (1,633) (2,27) Direct taxes paid 2,473 2, ,233 1,73 2,448 Cash Flow from operations 3,66 4,97 4,51 4,113 5,39 6,967 (Inc.)/ Dec. in fixed assets (1,84) (2,984) (4,) (5,) (4,) (3,) (Inc.)/ Dec. in investments (2,727) (11,72) (Inc.)/ Dec. in loans and advances Other income Cash Flow from investing (4,567) (14,56) (4,) (5,) (4,) (3,) Issue of equity (171.7) 8,51-7, Inc./(Dec.) in loans (555) 464 2, 3,5 2,5 5 Dividend Paid (incl. tax) Others (1,856) (2,257) (1,176) (1,665) - - Cash Flow from financing 95 1,489 2,928 12,379 1,973 (25) Inc./(Dec.) in cash (2) 1,34 3,429 11,492 3,283 3,717 Opening cash balances 1,115 1,113 2,454 5,883 17,375 2,658 Closing cash balances 1,113 2,454 5,883 17,375 2,658 24,375 October 27, 21 11

12 Key Ratios Y/E March FY27 FY28 FY29 FY21 FY211E FY212E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (post-tax) Cost of Debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC capital cycle (days) Solvency ratios (x) Net debt to equity.4.1. (.2) (.2) (.2) Net debt to EBITDA.4.3. (1.4) (1.3) (1.1) Interest Coverage October 27, 21 12

13 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Sterlite Industries 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) October 27, 21 13