Q2 has been solid, but see better H2FY15: Sesa Sterlite

Total income from operations slipped 22.7 percent (up 13.5 percent sequentially) to Rs 19,448 crore in the quarter ended September 2014 compared to Rs 25,170 crore in same quarter last year.

Below is the transcript of Tom Albanese’s interview with CNBC-TV18's Menaka Doshi and Nigel D’Souza.

Menaka: How you would characterise the quarter gone by given that expectations were rather low in terms of Sesa’s performance?

A: Given the production numbers which again we knew were going to be in a low production period in the same quarter from the Zinc business in particular coming in strongly in second half. These were a solid set of numbers. We were up 15 percent on the prior year period for the same period. If you look at sort of the numbers before exceptional items and on a quarter-on-quarter (Q-o-Q) basis the numbers are even up more than that. We had EBITDA of Rs 6,300 crore and EBITDA margins of 46 percent. So in this environment particularly with subdued markets we are strong in those businesses particularly zinc which is quite strong right now and as I look at this I see stronger production numbers going into the second half particularly around zinc which is where the strongest market is. So we are is looking pretty good.

Menaka: What would you attribute that EBITDA improvement or margin improvement on. Realisations as well as demand; can you talk us through the environment on both fronts?

A: First of all it is more around us having our own ability to increase our production levels based on the markets. So they are particularly in India the markets are taking a product. We are in a subdued commodity sector. We are going to have to live with softer oil prices and a more sensitive copper.

Although copper prices have risen just over the past couple of days we were seeing strike scenarios like Chile and Indonesia. So the markets are reasonably balanced but what is important is that for us in this subdued market environment the strongest of the metals in the London Metal Exchange (LME) is Zinc and that is where we have some good numbers coming into the second half.

Nigel: With regard to your aluminium business could you break that up for us because that is something that has been showing an improving trend and just look at your EBITDA of aluminium business, it is looking quite good. So break that up for us in terms of Bharat Aluminium Company Limited (BALCO) as well as VAL?

A: As I have been speaking over the past couple of months and certainly on your program that we see a good net realizable aluminium market. If we look at the LME price which have lifted up a couple of hundred dollars over the past 12 months but also physical premiums have also been quite strong. So we are seeing net smeltor returns, that is well over USD 2,400 per tonne and in this environment we certainly are incentivised to increase our overall production level.

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So over the past six months we have been increasing our production in BALCO. We have put 84 pots in on our new pot-line of BALCO and we have begun the process of putting pot-lines in on our captive production. So we have flagged the 50 new pots in Jharsuguda, our intention to bring on as if yesterday we had about 16 pots up. So I would hope to see this over the next year or so and will continue to add new aluminium metal into a reasonably strong aluminium market.

Nigel: Then with regard to your bauxite availability, what’s it been like and also with regard to your coal availability? Could you break that up for us how have the e-auction sales been, how much are you all importing at present?

A: Unfortunately for both bauxite and for coal it has been hand to mouth. We have been working hard to get our own bauxite concessions particularly in the recent but we have had to rely on the purchase of bauxite and the imports of bauxite in the absence of having our own captive bauxite.

Fortunately the aluminium market has been relatively soft for past six months. So we can balance this off. Coal has been a problem for us and anyone in the Indian market over the past six months. We have really seen a complete elimination of the e-market for coal. So we had to rely almost entirely for our non allocated coal from the import markets and what we foresee is a higher level coal imports for India in total then even would be probably estimated by the government at this time and I suspect that this challenge will continue in the coming quarters.

Nigel: The promoters have been buying stake in this year itself. They are close to around 5 percent higher. What is the plan going ahead?

A: We like the market that we are seeing. You have seen ? 4:37 acquiring some shares opportunistically of Sesa Sterlite in this particular market and again from a long term picture I am certainly very positive on the resources face and India as an emerging market ground floor opportunity is a great place to invest.

Nigel: Consolidation that is going to take place with Cairn India that is why you all are increasing stake so that when in fact the consolidation happens then the promoter stake doesn’t fall too much?

A: I am looking at the broader market. I am looking at the fact that India is a ground floor opportunity and those things that we can control and we will just take a step at a time.

Menaka: Can you give us a slightly more macro view on where you see the demand scenario, where we are on the commodity down cycle and how you are expecting some of this to play out over the next few months or maybe even the next few quarters?

A: First of all most of the commodity markets that we are in are driven more by the Chinese market environment, than it will be the Indian market environment. Chinese continue to the price setter for most of the commodities. Although you have had some like oil and iron or which are driven by new supply coming in. So you have a bit of an oversupply market in those areas.

Chinese Gross Domestic Product (GDP) numbers came in last week. They were in the low sevens. That does represent a slowing down. If you go back three years ago Chinese economic performance was about what the economists would have said was the best case. They managed to slow down the Chinese economy. It is actually reasonably balanced and reasonably well placed for the resources sector.

Resources right now given this uncertainty in Europe, given that there is still uncertainty as to when you are going to see fiscal stimulus in the US easing off has created some uneasiness in those resource markets. From my own perspective the supply and the demand is reasonably balanced. From most of things that we are in zinc in particular is where we see large amounts of global supply coming off the market over the next year or two. That has led to a strong uplift in LME prices. We would expect that to continue that in foreseeable future.

Menaka: Would you sort of alter your view and would that view become little bit more negative if we continue to see very weak data come in from Europe and even from the US recovery because as of now besides China those two also seem to be key worry areas as does Japan. So at this point in time would you say that your outlook is more negative than positive on which way demand will go or that demand will go south?

A: As long as Europe says reasonably in a flat to low growth environment it doesn’t go into another one of those collapses that we would have seen two years ago and as long as the US continues to have a slow pace of economic growth nothing spectacular and again Japan sort of holds its own. The real driver in place ultimately will be China. So, China is the price maker. They are the buyer out there. The average Chinese consumer is increasing it’s overall production. China consumes 40-50 percent of world’s aluminium, copper, steel, etc you name it. So as long as China stays on that path that they are now we will have a reasonably balanced market. Although short term price movements may be driven off of what the speculator sees is going on in Europe, Greece, US etc. The long term price formation is going to be triggered more from China than anything else.

Menaka: At this point in time do you feel more bullish about investment plans or are you on the back foot?

A: As we have announced today we are looking quite seriously on our zinc expansion opportunities within our business in South Africa. So that would flag with you that on a going forward basis for those commodities that we like or really want to invest in we will be looking for investment opportunities. For metals like aluminium, iron ore while they are relatively stable pricing the key first step would be to make sure that we get our existing capacity up and running. So, for aluminium it really is by getting our pot-lines up and running, getting the power available for those, getting our access to coal, getting access to bauxite and then take the capital we have already invested and put it into better work.

Menaka: When you said opportunities were you also referring to inorganic opportunities?

A: For the most part we have got a good set of organic choices ahead of us right now. Of course we have always been mindful of inorganic opportunities but we do have a full plate of organic brown field, green field opportunities on our plate as it sits today.

Menaka: What did you make of the ordinance, some of the specifics in that, but a lot of specifics still awaited and do you see big participation in that coal auction?

A: We are awaiting for the specifics but for my own part I am bullish about our readiness to participate in an auction going forward. Over the past few weeks I have seen some encouraging commentary to put all captive producers whether they are cement, steel or aluminium on the same level playing field in anticipation of an auction. So, that is actually a reassuring development compared to what we would have heard, say a month or two ago.

The other thing I had been quite encouraged by would be the sort of signalling by the government, just over the past week or two that they may be considering the non state owned owners of coals selling coal into the open market if there is an open market there. Clearly the demand for coal in India is much higher than supply of coal. So the government should be doing everything in power to get the coal to the consumers in India and if there was more clarity by the government on the ability of a non state owned coal producer to sell into the market it would actually see even more opportunities, more interest in an auctioning process.

Menaka: But more interest would also mean higher prices discovered in an auction. So I am just curious as to what you are factoring in?

A: That it represents business opportunity. It is a business opportunity and again if you really want to bring modern capital you want to bring the best of class of international technologies those top mining companies around the world that are in the coal mining business that have the highest productivities on a per capita basis will do it.