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India: Metals & Mining
Risk-reward balanced: Tata Steel C-Buy; JSW, Hindalco to Neutral
Risk-reward balanced; Downgrade JSW, Hindalco on valuations
While we continue to be structurally positive on the India metals and
mining sector, especially steel, from a medium- to long-term perspective,
we believe that the recent outperformance has made the risk-reward less
compelling than before. Moreover, we expect metal stocks to remain range
bound in the near-term, given lack of positive catalysts. We downgrade
JSW Steel and Hindalco to Neutral from Buy, as the stocks have limited
upside potential from current levels. We also incorporate new commodity
price assumptions (steel and base metals) and roll-forward our valuation
framework to FY12 estimates. Subsequently, we revise FY11E-FY13E EPS
for our metals coverage by -18% to +23%, and our 12-m TPs by -3% to +8%.
India Steel: Near term headwinds to keep stocks range bound
Although we expect 2HFY11 to be relatively stronger on higher prices and
improved demand, margin recovery may be slower-than-expected, in our
view. While we continue to be positive on India steel demand (12% FY11E
growth), we believe that steel mills’ ability to pass through input cost increases
will be constrained in the near term—our channel checks suggest that steel
prices will remain muted till early 2011, amid weak trend in global prices, slow
offtake in some segments (longs) and currency appreciation, accentuating the
challenge posed by imports. We revise down our FY11E price forecast by 3%,
to account for slower-than-expected recovery in pricing.
India Base Metals: Dollar weakness to keep prices firm
Since end-August, LME prices are up 17%-26%, on a weakening USD and
expectations of quantitative easing in the US, in our view; further, the
proposed introduction of physically-backed exchange-traded funds (ETFs) in
base metals kept prices firm. As per our GS&PA commodities team, an
extended period of USD weakness would result in higher USD-denominated
commodity prices and consequently they have raised their commodity price
forecasts. There is no change to the order of preference among metals—
copper remains our top pick, with aluminum being the least preferred metal.
We reiterate Buy (on CL) on Tata Steel as we believe the current price does
not reflect Tata Steel’s strong growth trajectory (46% FY10-FY13E EBITDA
CAGR) and improving return profile, driven by robust profitability in India and
sustainable recovery in Europe. We reiterate Sell on NALCO on valuations
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