Sterlite Industries: Taking Advantage of the Dip

As discussed in our previous blog entry What Next?, taking advantage of the general market weakness over the last two days and a nearly 15% drop in Indian mining giant Sterlite Industries (SLT) yesterday, I am starting a position in the company both in the model portfolio and my personal portfolio. I will use the closing price of the day to purchase 2,000 shares of Sterlite for the model portfolio. We added Sterlite to our watch list in January 2008 and I have been patiently waiting since then for an opportunity to get into this company.

As a subscriber pointed out yesterday morning, the company has a market cap of $3.34 billion and is trading below the value of cash and short-term investments it holds even after taking out short-term and long-term debt. This is based on the March 2008 balance sheet available on Yahoo Finance.

Looking at the balance sheet as of June 2008 on Google Finance, both current assets and total assets have gone up more than the increase in current liabilities and total liabilities. Please note that the financials on Google Finance are in Indian Rupees and you will need the exchange rate of $1=Rs48 to convert the numbers to dollars.

Comments

[andyn:]

Is it trading below cash value due to the Asarco deal?
I thought that was off the table when SLT paid that $50M breakup.

This stock is a steal down here, but then again Mr. market is not wrong generally to leave dollars on the road.

Anyway, I will get in once the mediation over Asarco is over.

2008 Nov 07 08:54 AM

[Asif Suria:]

Interesting observation Andyn. Given all the legal issues around Asarco, I would personally prefer the deal not go through.

According to their annual report, they had $3.9 billion in cash and short-term investments. A $50 million break-up fee does not change things a whole lot.

I agree with you that there are usually no free lunches in the market but we are in highly unusual times right now. The stock was originally dragged down when the India bubble burst in Jan, then the drop in commodity prices, then the rather complicated restructuring that they thankfully abandoned and now by a global financial meltdown. It looks like this stock just could not catch a break since the start of this year.

The stock was trading at $26.32 when I added it to my watch list on Jan 4th and I finally got in after it had dropped over 82%.

Can it head lower? Sure. But the risk/reward comparison at these levels makes Sterlite a compelling buy at these levels in my opinion.

www.sinletter.com/watc...

2008 Nov 08 03:38 PM

[Tomorama:]

Sterlites cash dropped by almost 30 % from March to end of June. At the same time, they reduced long termb debt only by 8%. Why is this cash burn? It is undermining the whole notion of a cheap stock. Add falling commodity prices, and you get a 5 dollar stock.

2008 Nov 10 04:57 PM