Ambit previews Metals & Mining for 2QF11 (September quarter)

Metals & Mining
 Our Metals coverage universe is expected to report flattish revenues due to
strong volume growth in the steel sector which offset the pricing decline in the
quarter. In the non-Ferrous space, alumnium prices were marginally 2% lower
QoQ, and Hindalco’s aluminium production was hit by the one-time factors.
 We expect EBITDA margin deterioration from 23% to 20% led by higher input
costs in the ferrous space - the iron ore and coking coal prices during the
quarter increased QoQ. In 3QFY11E, the trend is expected to reverse - with
steel prices moving up and contracted prices for coking coal and iron ore
easing, and so margins should expand again.
 Earnings, pre-exceptional, are expected to decline 16%, primarily on account
of lower EBITDA levels.
 Since September beginning, the INR has appreciated by~5.5%. In case of an
appreciating INR, the Indian steel industry is negatively impacted as the import
parity prices get lowered. On the positive side, the Dollar Index has
depreciated by 6.5% over the same period, and this has positively impacted
the metal prices.
 In case of further rupee appreciation, among our coverage companies, Nalco,
Sesa Goa and Hindalco will be most adversely impacted. For a 5%
appreciation in the rupee, our annual EBITDA estimates for these three
companies will fall by approximately 13%, 10% and 6% respectively.

 Our key stock picks in the sector are Hindalco, Tata Steel and JSW Steel.