Sterlite Industries (SLT) displays a year-to-date negative correlation to the overall performance of the market. While the S&P has returned nearly 7% year-to-date, SLT's security market price has declined nearly 17.19%, and now offers a favorable entry point for investors targeting companies with suppressed valuation. This article will provide a brief overview to SLT's business model, highlight its recent performance, and conclude with six reasons why investors should consider SLT at its current valuation.
SLT stands at the top of its industry as India's largest non-ferrous metal and mining company. SLT's operations are sustained through its captive power plants operating in four key business segments:
SLT's primary source of revenue is generated from the copper segment of its operations. SLT is the leading copper producer in India with an annual production of well over 3.3 million tonnes. Under this segment its operations consist of smelting, processing, and production of the coppers byproducts. Of each segment listed above, SLT's manages and operates through multiple subsidiaries. As of the most recent reporting period, SLT owned a total of 32 subsidiaries. For further information, please visit SLT's company website.
Currently, SLT is trading right above $7 per share and with 840.30 million shares outstanding its market capitalization is nearly $6.01 billion. As you will see below, SLT's stock price has just experienced a small pull back forming a strong six month support line. SLT's decline it market value per share can be attributed to the regulatory decisions made by the Supreme Court of India. The most influential decision consisted of a ban imposed on operations in over 90 different mines.
Figure 1: SLT's One Year Price Graph from FinViz
Six reasons to consider SLT at $7 per share:
- From a technical standpoint, SLT displays signs of being highly oversold. SLT's thirty day relative strength indication (RSI) is approximately 25.97, which falls perfectly within the prime oversold range of an RSI of 20 to 30. This suggests there is a high probability of an upward rising trend in its stock price.
- SLT provides strong diversification benefits to investors seeking assets with negative correlation to U.S. markets. Using SLT's historical holding period returns, I computed a correlation coefficient of -0.6 with respect to the S&P's holding period returns of the identical time frame. This is also supported through SLT's beta value of 2.03, which is slightly above the market beta of 1.
- From a macroeconomic view, SLT is an Indian equity and offers favorable exposure to a currency that is highly undervalued -- the Indian rupee. On a real effective basis, the Indian rupee is clearly undervalued along with multiple other emerging market currencies. As a result of QE3, policy makers in emerging market countries and other countries with undervalued currencies are focused on implementing policies that involve a currency cap. This provides a favorable advantage for investors because companies operating in these economies are perfectly positioned to excel from currency appreciation. These policies will inevitable result in an increase in the money supply, which will lead to augmented valuation in equity markets in countries such as India.
- SLT is positioned to benefit from an increase in the Chinese demand for copper. Currently, China accounts for nearly 40% of the entire demand for refined copper around the world. China's copper imports increased by approximately 3% in January 2013 and expansionary measures involving new infrastructure only makes a continued increase in these levels more feasible.
- SLT is also positioned to benefit off a potential upward sloping cost curve. As basic as the economic principles may seem, the increasing demand for copper has the potential to augment the price of copper by 5%. A increase in the average pound of copper would greatly aid in augmenting SLT's profit margins.
- Nine analysts that cover the stock have a six month median price target of $11.50. The range of these estimates deviate by$6 with a minimum and maximum of $8 and $14 respectively.
In conclusion, SLT is an undervalued company that has the potential to provide investors with a substantial upside. Its India based operations provide perfect placement for investors seeking strong diversification, a hedge from US markets, and high potential capital gains derived from currency appreciation.
Sources: FinViz, YCharts, and Google Finance.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.