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Avoid shares of Sterlite Industries

Volatile metal prices, high PE ratio make the stock unattractive

I am interested in buying shares of Sterlite Industries. Is this a good stock for a long-term investor, who has an investment horizon of at least five years?
R. Awasthy

Sterlite Industries is a non-ferrous and mining company. Its primary businesses include aluminium, copper, zinc and lead, and commercial energy. The company's expansion of its zinc, aluminium and power businesses is now nearing completion. The zinc business, which is highly profitable, contributes nearly 50 per cent of its total earnings. The company has registered a robust five-year compounded annual growth rate (CAGR) of nearly 51 per cent and 26 per cent in profit after tax and sales respectively. It has maintained a very low level of debt-to-equity ratio in the last few years: it stood at 0.24 times in FY10. However, the return on net worth declined nearly 1.2 percentage points in FY10 as compared to FY09 and currently stands at 5.97 per cent.

In recent months, non-ferrous commodity prices have tumbled due to fears of what may happen next in Europe and an expected slowdown in China's appetite for metals. But now with China's decision to make the yuan more flexible, expectations are building up that a revaluation would make Chinese imports cheaper. This could lead to higher imports by China, thereby improving demand for commodities of which it is the largest consumer. This would in turn lead to rise in the prices of metals.

The stock price of the company has jumped nearly 12 per cent in the last one year (June 30, 2009-June 30, 2010). The company has recently announced a bonus in the ratio of 1:1.

But once you factor in the volatility risks related to metals and a high price-to-earnings ratio (P/E) of 51.6, the stock looks unattractive. If you are a conservative investor, you would do well to avoid this stock presently.

Fundamentals of Sterlite Industries
RoNW (%) 5.97
RoCE (%) 5.57
Debt-equity ratio 0.24x
EPS (Rs) 3.29
5Y EPS growth rate (%) 23.61
5Y Median PE^ 39.21x
P/E^ 51.67x
BV per share^ (Rs) 66.15
All data as per FY10, ^as on June 30, 2010

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