Sterlite Industries (India) Limited
Sterlite Industries operates as a non-ferrous metals and mining company in
India and Australia. It is a subsidiary of Vedanta Resources plc a London
based diversified FTSE 100 metals and mining group. Its main subsidiaries
are Hindustan Zinc Limited (HZL), Bharat Aluminum Company Limited
(BALCO) and Sterlite Energy. It is engaged in copper, zinc, aluminum and
commercial power generation. The company has a world class copper
smelting and refinery operations in India. The main operating subsidiaries of
the company are Hindustan Zinc Limited for its zinc and lead operations;
Copper Mines of Tasmania Pty Limited for its copper mine in Australia; and
Bharat Aluminum Company Limited for its aluminum operations. The
company has 2,400MW independent power plant through its wholly owned
subsidiary, Sterlite Energy Limited.
Its operations also include a copper smelter, two copper refineries, three
copper rod plants, a Dore anode plant, sulphuric and phosphoric acid plants,
and captive power plants, as well as a precious metal refinery in the United
Arab Emirates. Its fully-integrated zinc business is owned and operated by
HZL. Its aluminum business is owned and operated by BALCO. During the
fiscal year ended March 31, 2010 (fiscal 2010), its copper production was
334,174 tons. During fiscal 2010, its zinc and lead production was 768,620
tons. During fiscal 2010, its aluminum production was 268,425 tons. It offers
copper cathodes for use in the manufacture of copper rods to the wire and
cable industry, and for making alloys, such as brass, bronze, and alloy
steel with applications in defense and construction, as well as copper
tubes for consumer durable goods; copper rods that are primarily used in
power and communication cables, transformers, and magnet wires;
sulphuric and phosphoric acid to fertilizer manufacturers and other
industries; and other by-products, such as gypsum and anode slimes to
third parties. The company also produces and sells zinc ingots to steel
producers for galvanizing steel, as well as to alloy, dry cell battery, die
casting, and chemical manufacturers; lead ingots primarily to battery and
chemical manufacturers; and silver ingots primarily to industrial users of
silver. In addition, it produces primary aluminum in the form of ingots and
wire rods that are used for aluminum castings and the fabrication in the
construction and transportation industries, as well as in various electrical
applications; rolled products, including coils and sheets for the aluminum foil
manufacturing, printing, transportation, consumer durables, building and
architecture, electrical and communications, packaging, and general
engineering industries; and Vanadium sludge, a by-product of the alumina
refining process and is primarily used in the manufacture of vanadium-
based ferro alloys. The company is based in Mumbai, India. Sterlite Industries
(India) Limited operates as a subsidiary of Twin Star Holdings Limited.
• Since Sterlite Industries is a non-ferrous metals and mining company,
let us first see the overview of non-ferrous market in India.
Market Overview (Reasons to invest in Metal Industries)
The metal industry is a key sector in the Indian economy as it meets the
requirements of a wide range of important industries such as engineering,
electrical and electronics, infrastructure, automobile and automobile
components, packaging etc. The metal industry consists of two major
groups: ferrous metals and non-ferrous metals.
Non-ferrous metals, which include aluminum, copper, zinc, lead, nickel and
tin, are used to make alloys, castings, forgings, extrusions, wires, cables,
pipes, etc., and find their application in a number of sectors such as
agriculture, infrastructure facilities like power plants, automobiles, railways,
telecommunications, building and construction and in engineering and
chemical plants.
There are significant reserves of non-ferrous metal ores in India. India is rich
in bauxite (aluminum ore) and has grades of zinc, lead and copper reserves.
Copper, lead and zinc are also imported as scrap or concentrates to be
processed by secondary/custom smelters. Nickel and tin are also imported
by India.
The industry is highly fragmented, especially in down-stream
segments.
The industry is highly fragmented, with a large number of players in both
organised and unorganised segments across ferrous and non-ferrous metal
groups.
The Nonferrous metals industry comprises primary and secondary segments.
Primary producers are those players who process the mined ore into primary
metal, which is commercially available in the form of rods, ingots, cathodes,
wires etc. Secondary producers are those players who manufacture value
added products like foils, extrusions, dry batteries, castings etc. either by
procuring the metal from the primary producers or from scrap.
The primary segment has only a few players; for example, the zinc industry
is duopolistic (only two players), the lead industry is a monopoly and in the
case of tin and nickel, there are virtually no players in the primary segment.
However, in the secondary and downstream segments there are many
players both in the organised and in the unorganised sectors.
The non–ferrous metals industry in India is growing strongly aided by the
privatisation process started in early 2000. By 2020, it is expected that the
industry, comprising aluminium, copper, lead and zinc sectors, will be
completely privatised, and India will grow to become a global player in the
non-ferrous metals industry.
Aluminium
India has nearly 10 per cent of the world’s bauxite reserves and a growing
aluminium sector that leverages this. Demand in the domestic market is
expected to grow by 8-10 per cent in 2011-12. By 2020, India is expected to
have installed aluminium capacity of 1.7 to 2 million tonnes per annum.
The primary market for aluminium in India is the power sector, which
consumes about 35 per cent of the domestic production. This is in contrast to
the global market, where the bulk of aluminium is consumed by the
construction and packaging sectors. The ongoing reforms in the power sector
and focus on improving power infrastructure, is expected to further boost the
aluminium sector in India.
Copper
Copper is a key sector impacting the Indian economy. Copper has a number
of applications across several sectors such as telecom, power, construction,
transportation, handicrafts, engineering, and consumer durables.
The Indian industry has an installed capacity – about 597,500 tonnes per
annum in 2009-10 - that is greater than the domestic market – about
390,000 tonnes - leading to a surplus situation. This is an advantage that can
be leveraged for boosting exports, especially since the Asian region has a
deficit of around 2.6 million tonnes. Nearly 40 per cent of copper production
in India is currently exported.
The industry currently has three major players - Sterlite, Hindalco and
Hindustan Copper Ltd. (HCL), which together account for nearly 80 per cent
of the total copper production in the country. While HCL is the only primary
producer, which mines and refines copper, Hindalco and Sterlite are
secondary producers, who process indigenous and/or imported copper
concentrate to produce end products like copper bars, rods and wires.
The performance of the copper industry is highly dependent on the
performance of and demand for products like power and telecommunication
cables, transformers, generators, radiators and other ancillary components.
Hence, its growth is closely linked to the country’s economic and industrial
growth. India has been growing at a steady and sustained compounded
average growth rate of 5.6 per cent for the past 20 years. This is expected to
improve further to a level of around 8 per cent in the future. The outlook for
the copper industry in India is therefore positive.
Zinc
With the privatisation of the largest zinc producer, Hindustan Zinc Ltd, sold
to the Sterlite group in April 2002, the Indian zinc industry is completely
under the private sector and is in the midst of expansion.
At present the smelting capacity for primary zinc in India is 360,000 tonnes
per annum, as against a domestic demand of about 450,000 tonnes per
annum. Over the next 5 to 6 years, demand is expected to grow at about 12
– 15 percent annually, as against a global average of 5 per cent. Domestic
production capacity, however, is also expected to increase to attain self-
sufficiency by 2012.
The main consumer for zinc in the domestic market is the steel industry –
over 70 per cent of zinc is used for galvanising. Other sources of demand for
zinc include die-casting, guard rails for highways and imported-substituted
zinc alloys.
The steel industry has bright prospects with demand drivers being the
construction industry and exports. With continued infrastructure
development such as roads, irrigation, construction, oil & gas, ports etc,
there is a rising demand for steel, thus providing significant opportunities for
zinc in India.
Exports – potential for growth
In case of non-ferrous metals, India is a net exporter of copper and net
importer of zinc. 40 per cent of copper production in India is exported. Given
the surplus in production of various metals in India and deficit in other
markets, there is ample opportunity for growth in exports for the Indian
Metals industry.
Foreign Direct Investments (FDI)
In India, 100 per cent FDI has been approved in metallurgical industries since
1991. During the period 1991-2010, the industry received 607 approvals for
FDI worth US$ 7.27 billions. Actual inflow of FDI has been US$ 1.31 billion.
The metallurgical sector accounts for 6.31 per cent of total FDI approved in
India.
Competitive Advantages
India’s competitiveness in metal industry can be analysed by using the
framework given below.
• The key advantages can be categorised under:
⇒ Growing market demand.
⇒ Favorable factor conditions for production.
⇒ Presence of related and supporting industries.
⇒ Government support for helping companies improve
performance and stimulating industry environment.
Growing market demand
Metals constitute a key input to other manufacturing sectors like
engineering, electrical and electronics, automobile and automobile
components, packaging
etc, and infrastructure. The performance of the metal sector is hence a
reflection of the overall economy.
There are several positive indicators for growth in the metals industry, such
as capacity creation and growth in sectors like infrastructure, power, mining,
oil & gas, refinery, automotive and consumer durables. For example,
• India’s overall economic growth is expected to sustain an annual
projected growth of about 8 per cent. The manufacturing sector, that
currently
constitutes about 17 per cent of GDP, is expected to grow faster and
contribute significantly to the overall economic growth. This will have a
positive effect on the demand for metals.
• A large number of domestic as well as multi-national players
• Highly competitive industry in secondary and downstream segments
• User industries include engineering, electrical, electronics,
infrastructure, automobile and automobile
components, packaging etc.
• Highly demanding consumers
• Demand linked to the industry growth
• Well developed mining industry
• Well-developed Engineering industry in terms of capability in producing
plant and machinery for manufacturing steel, aluminium etc.
• India's comparatively cheaper and skilled workforce can be effectively
utilized to setup large low cost production bases for domestic and
export markets.
• Huge investments from the companies for capacity expansion &
growth etc.
• Liberalized overall policy regime
• Customs duty on primary and secondary metals reduced
• Foreign equity holding is allowed up to 100 percent on the automatic
route Government.
• Major infrastructure projects such as the World Bank-funded Golden
Quadrilateral Project and the North-South and East- West corridors
linking major cities across the country have also fuelled the industry’s
growth, which in turn, has positively impacted the metals industry.
The user industries are also getting increasingly demanding and
sophisticated. This drives firms in the metals industry to constantly improve
their competitiveness through innovative products higher quality, thereby
improving their global competitiveness.
Favorable factor conditions for production
India has rich reserves of minerals like bauxite, iron ore, copper, zinc etc.
India has large resources of high-grade bauxite deposits - 3037 million tones.
India ranked fifth in the world bauxite reserves next to Australia, Guinea,
Brazil and Jamaica. Bauxite reserves in India account for 7.5 per cent of the
world’s total world deposits.
India also has a growing workforce that is English-speaking and highly
skilled. India’s well developed designing and machining capabilities makes it
second only to Germany in these areas. These strengths provide competitive
advantage to India in the engineering and manufacturing fields, which in turn
positively, impact the metals sector.
Conditions are also favorable for the sector’s growth, from the point of view
of capital investments. Indian players in the sector have been investing in
capacity building to fuel growth. Sterlite Industries (India) Ltd. (SIIL) is
expanding. Ample availability and potential growth in key factors of
production provide the right stimulus for India’s Metals sector to grow and
become globally competitive.
Presence of related and supporting industries
Apart from the favorable demand and factor conditions, the Indian metals
industry is well supported by India’s mining industry and educational and
research institutions.
India is endowed with significant mineral resources and has a well-developed
mining sector to leverage these resources. Indigenous mining capability
supports the metals sector by making available raw materials at lower costs
and reducing dependence on imports.
India also has several educational institutions, including the Indian Institutes
of Technology (IITs) for advanced studies in the areas of metallurgy and
materials science. These not only provide a steady stream of qualified
persons to the metals industry, but also promote fundamental research and
innovation.
Government Regulations and Support
The Government of India has revised its foreign direct investment policy to
attract foreign investments in the metal sector. Government initiatives to
boost the end-user segments (like telecom, power, construction,
transportation, engineering, consumer durables etc.) also have a significant
positive impact on the demand. Some of the policies aimed at boosting
investment and growth in the metals sector are:
• Foreign equity holding is allowed up to 100 per cent on the automatic route
for all non-fuel, non-atomic minerals except diamond and precious stones for
which the limit for automatic approval is 74 per cent foreign equity.
• Thirteen minerals like iron ore, manganese ore, chrome ore, sulphur, gold,
diamond, copper, lead, zinc, molybdenum, tungsten, nickel and platinum
group of minerals, which were reserved exclusively for public sector have
been thrown open for exploitation by private sector.
• Entered into a Free Trade Agreement (FTA) with Sri Lanka, which has
resulted in a large influx of copper and copper products at zero import duty
from Sri Lanka.
Government has come up with India’s National Steel Policy draft, which
envisages production level of steel to touch 100 million tonness by the end
of 2020.
These government policy initiatives reflect the importance perceived by
government of the metals sector. Liberalised overall policy regime, with
specific incentives, provides a very conducive environment for investments
and exports in the sector.
Future outlook
The outlook for the metals sector in India is bright. Sustained growth is
expected across all key segments, aided by several factors, such as growing
domestic demand, investment in capacity addition, increasing supply deficit
in other countries and favorable government regulations.
• Government’s initiatives such as power and infrastructure development,
reduction in import duties and facilitation of FDI, along with overall economic
growth, will provide a boost for the Indian metal industry.
• Growth in the steel sector will have an immediate positive rub-off on the
zinc sector, as 70 per cent of zinc production is used for galvanising.
• Current shortages in worldwide copper supplies are expected to continue
following production cuts by leading producers in Mexico and Chile. This
would further shore up demand for Indian copper. For aluminium, exports
would be a major demand source.
The positive outlook in the Indian metals sector has attracted multinationals
like BHP Billiton and Rio Tinto to enter India for prospecting. At the same
time,
successful Indian players are looking at acquiring mining rights abroad – for
example, the AV Birla group has acquired mining rights in two copper mines
in Australia.
• The metal sector in India is clearly an attractive sector for
investment and offers significant growth potential both in the
domestic as well as exports markets.
Over the next 12 months, I believe that there are several reasons to be
positive about the outlook for base metals and base metal equities,
including: metal inventories are low throughout the supply chain;
investors are increasingly looking to commodities as a hedge against
inflationary pressures and a weaker U.S. dollar; and the credit crunch will
continue to delay mine development, thereby muting a supply response
from mining companies once demand does rebound. In 2011, I expect
metal markets to be more settled as a new normalized level of supply
and demand becomes apparent.
Company Overview (Reasons to invest in Sterlite
Industries among metal industries)
