MUMBAI (Commodity Online): Sterlite Industries still has to bank on zinc as far as its best performing sector is concerned.

The contribution of zinc, towards overall operating profit of the company during September 2009 quarter, has increased sequentially by 330 basis points.

According to Economic Times, in spite of a 25% year-on-year decline in net profit, the result beat the Street estimates, both in terms of revenue and net profit.

Zinc is probably the only base metal, which has crossed its last year price level. The rise in volume and a weak rupee also worked in favour of the company. The production volume of both copper and zinc rose by around 13%, reckoned on a y-o-y basis. The management maintains that the domestic demand for base metals continues to remain strong.

Most of the base metal prices have improved significantly last quarter, but are still lower than the previous year’s level. For instance, the London Metal Exchange (LME) aluminium prices in September 2009 quarter increased by 16% to $1890 per tonne which is around 22% lower than same period last year.

Hence, the quarterly result appears to be subdued on a y-o-y basis, but has improved on a sequential basis. The bulk of the rise in the company’s operating profit has come from sequential rise in base metal prices. Copper and zinc contributed close to 90% of total operating profit (profit before interest and tax).

Its zinc & lead business performed exceedingly well, thanks to rise in prices. This is the only major business segment, which witnessed y-o-y growth in operating profit and contributed more than three-fourths of the company’s total profit. The operating profit coming from copper business also got doubled sequentially to Rs172 crore.

The profit numbers would have been better had the realization from by-products not fallen so sharply. For instance, the realization from sulphuric acid, a by-product of copper operation, fell by close to 96%. As a result, the company’s overall operating margin remained at the same level as it was in previous quarter.

The next quarter, however, could be a better one for Sterlite Industries. The end of the commodity cycle base effect, coupled with its lower unit cost of production, is definitely going to result in a significant improvement in y-o-y growth numbers. The company has been trying to make its different business segments more integrated and this is likely to result in higher operating margin.

Considering the current result, we expect the company’s full year earning per share (EPS) to be in the range of Rs 45-50. At the current price level, the stock is trading at a forward price-earning multiple of around 15-16.

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