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India Metals & Mining
A Steely Quarter
• A steely quarter: As we highlighted in our report on Indian ‘Steel- Sharp
Earnings Volatility Ahead; Mapping the impact of the 3 key variables into the
P&L” dated 24 Jan 2011,’ we think Indian steel companies should report very
strong March quarter earnings driven primarily by ASP increases (6-10%) even
as costs remain relatively flat q/q. However, steel volumes have been
disappointing with most steel companies pointing to flat/low growth q/q in what
traditionally is the strongest quarter for demand. Steel demand remains an issue,
as the biggest sub sector, construction, remains in the doldrums, while autos
(which helped drive flat product demand last year) is seeing growth rates
moderate. We expect JSW to report EBITDA/MT of $210/MT and TATA India
at $445/MT. HRC steel prices are down 6-7% from peak levels and over the
next two months we think they should remain subdued. Domestic HRC prices
have started falling.
• Non ferrous-LME increases overshadowed by cost pressures: While both
aluminum and zinc prices are up q/q, cost pressure (coal, carbon costs)
continues. We expect HNDL’s standalone aluminum operations to be impacted
by the surge in carbon–related costs, while COAL's 30% price increase should
flow through next quarter. STLT should benefit from higher zinc+lead
production and relatively strong LME prices (though coal cost remains an issue
across segments for STLT). We expect the Anglo Zinc acquisition to partially
flow through this quarter.
• Mining- COAL, MOIL: While we believe COAL should see higher prices and
volumes, cost pressures (particularly employees) are likely to partially limit
earnings growth. Coal price increases would effectively flow through for only
one month, and the full benefit of the recent price increases would flow through
the June quarter. We expect MOIL to report a 38% increase q/q in PAT, driven
by higher volumes.
• Positioning for the earnings season - Remain buyers of TATA, STLT,
MOIL: Given that this is the year-end earnings season, which means most
results would only come in late May and being the last quarter of the year, there
could be higher provisions, it could be a 'noisy' earnings season. We continue to
prefer stocks that have: a) near-term ‘profitable volume growth,’ and b)
valuations are at a discount to global peers. TATA, STLT and MOIL are our top
picks.
Steel – Tepi volumes but strong pricing trends
Strong global prices led to sharp price hikes in Jan-Feb in flat products, but then
some discounts started in late March with lower-priced import offers and tepid
demand trends in Jan-Feb. Long steel product, which witnessed strong pricing in
Nov-Dec, declined in the 4QFY11 but has picked up again over the last one month as
construction demand failed to see a very strong seasonal recovery, as was expected.
Non-integrated players should see impact from somewhat higher raw material cost in
the quarter (while coking coal contract price increased 8% and spot iron ore was 13%
higher). The March results should be the best quarter as the companies should see the
full benefit from the price hikes takes in late 3Q and 4Q and much of the higher-cost
pressure would be felt in 1QFY12 onwards.
Tata Steel (Consolidated): We expect India operations to see strong results with a
7% increase in realizations q/q with a 3% sequential improvement in volumes
(consumption trends were weak in Jan-Feb). Given the lagged impact of steel prices
in Corus (we estimate it is at least one quarter),the March quarter would reflect the
weak prices of December, with the June quarter reflecting the steel price spike seen
in Jan-Feb. We expect EBITDA/MT for European operations at $45/MT at 4QFY11
vs. $25/MT in 3QFY11 with a 7% increase in volumes q/q. We expect consolidated
EBITDA at Rs42.0bn (+23% q/q; -12% y/y) and PAT at Rs14.7bn.
JSW Steel: We expect steel sales volumes of 1.64MT (+3% q/q; +8% y/y) with
ASPs higher by Rs3200/MT driven by the strong pricing trend in flat steel products
in Jan-Feb. While raw material costs will be higher q/q, we believe that the company
will see the benefit from the inventory of the lower cost raw material contracts in the
3Q (companies would have 1-1.5month RM inventory of previous quarter contract).
Therefore, in our view, JSW's standalone EBITDA/MT could be strong at $210/MT,
which would be the highest since 2QFY09. We forecast consolidated EBITDA of
Rs15.7bn (19% y/y; 55% q/q) and net profit of Rs6.6bn (+9% y/y). JSW should also
benefit from the iron ore ban in Karnataka (it will be lifted on April 20) as domestic
iron ore costs, in our view, would be lower.
Non-Ferrous – Higher LME likely offset by higher costs
Sterlite Industries: We expect consolidated EBITDA at Rs22.0bn (+0.5% y/y;
+11% q/q) primarily driven by higher LME prices during the quarter. As seen in
Table 2, LME prices increased 4-12% sequentially. Zinc segment would see
improvement from recovery in lead production (impacted in 3Q from the planned
maintenance shutdown at the Ausmelt and Pyro smelters) and also contribution from
the completed Anglo zinc asset acquisition. Aluminum operations should remain
weak, while power sales should not see much of a ramp up.
Hindalco (standalone): We expect Hindalco to report Rs8.6bn of EBITDA (3% y/y;
16% q/q), mainly on the back of higher LME aluminum prices and improvement in
production. We expect aluminium production to improve 7% q/q, given the floods
and fire that impacted production in 2Q-3Q. Production cost would also be higher
during the quarter due to higher coal and carbon costs. Copper production levels to
improve from 3Q levels.
Nalco: We expect Nalco to report 4QFY11 EBITDA of Rs4.5bn (+16% q/q) and
PAT of Rs3.0bn. We expect production to remain flat at 111kt but expect improved
realizations (+7% q/q) from higher LME.
Mining Earnings Preview
Coal India: We expect volume sales to improve (+10% q/q) with high rake
availability and increased e-auction volumes. ASPs should see some benefit from the
price hikes taken in late-Feb for MCL production and differential pricing for sectors
other than power, defense and fertilizers. We expect ASPs to increase 9% q/q, which
will also be aided by improvement in e-auction premiums. We are estimating CIL’s
EBITDA at Rs52.6bn (vs. Rs34.5bn in 3Q) and PAT of Rs41.5bn (vs. Rs26.3bn in
3Q) in the quarter.
MOIL: Volumes would improve sharply from the 3Q levels and we expect sales of
360kt (below the implied volume of 410kt based on volume guidance of 1.15MT for
FY11). However, we are estimating a 7% q/q decline Mn ore realizations, given the
weak global pricing trends and inventory destocking. We are estimating 4QFY11
EBITDA at Rs2.2bn (+40% q/q) and PAT at Rs1.7bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Metals & Mining
A Steely Quarter
• A steely quarter: As we highlighted in our report on Indian ‘Steel- Sharp
Earnings Volatility Ahead; Mapping the impact of the 3 key variables into the
P&L” dated 24 Jan 2011,’ we think Indian steel companies should report very
strong March quarter earnings driven primarily by ASP increases (6-10%) even
as costs remain relatively flat q/q. However, steel volumes have been
disappointing with most steel companies pointing to flat/low growth q/q in what
traditionally is the strongest quarter for demand. Steel demand remains an issue,
as the biggest sub sector, construction, remains in the doldrums, while autos
(which helped drive flat product demand last year) is seeing growth rates
moderate. We expect JSW to report EBITDA/MT of $210/MT and TATA India
at $445/MT. HRC steel prices are down 6-7% from peak levels and over the
next two months we think they should remain subdued. Domestic HRC prices
have started falling.
• Non ferrous-LME increases overshadowed by cost pressures: While both
aluminum and zinc prices are up q/q, cost pressure (coal, carbon costs)
continues. We expect HNDL’s standalone aluminum operations to be impacted
by the surge in carbon–related costs, while COAL's 30% price increase should
flow through next quarter. STLT should benefit from higher zinc+lead
production and relatively strong LME prices (though coal cost remains an issue
across segments for STLT). We expect the Anglo Zinc acquisition to partially
flow through this quarter.
• Mining- COAL, MOIL: While we believe COAL should see higher prices and
volumes, cost pressures (particularly employees) are likely to partially limit
earnings growth. Coal price increases would effectively flow through for only
one month, and the full benefit of the recent price increases would flow through
the June quarter. We expect MOIL to report a 38% increase q/q in PAT, driven
by higher volumes.
• Positioning for the earnings season - Remain buyers of TATA, STLT,
MOIL: Given that this is the year-end earnings season, which means most
results would only come in late May and being the last quarter of the year, there
could be higher provisions, it could be a 'noisy' earnings season. We continue to
prefer stocks that have: a) near-term ‘profitable volume growth,’ and b)
valuations are at a discount to global peers. TATA, STLT and MOIL are our top
picks.
Steel – Tepi volumes but strong pricing trends
Strong global prices led to sharp price hikes in Jan-Feb in flat products, but then
some discounts started in late March with lower-priced import offers and tepid
demand trends in Jan-Feb. Long steel product, which witnessed strong pricing in
Nov-Dec, declined in the 4QFY11 but has picked up again over the last one month as
construction demand failed to see a very strong seasonal recovery, as was expected.
Non-integrated players should see impact from somewhat higher raw material cost in
the quarter (while coking coal contract price increased 8% and spot iron ore was 13%
higher). The March results should be the best quarter as the companies should see the
full benefit from the price hikes takes in late 3Q and 4Q and much of the higher-cost
pressure would be felt in 1QFY12 onwards.
Tata Steel (Consolidated): We expect India operations to see strong results with a
7% increase in realizations q/q with a 3% sequential improvement in volumes
(consumption trends were weak in Jan-Feb). Given the lagged impact of steel prices
in Corus (we estimate it is at least one quarter),the March quarter would reflect the
weak prices of December, with the June quarter reflecting the steel price spike seen
in Jan-Feb. We expect EBITDA/MT for European operations at $45/MT at 4QFY11
vs. $25/MT in 3QFY11 with a 7% increase in volumes q/q. We expect consolidated
EBITDA at Rs42.0bn (+23% q/q; -12% y/y) and PAT at Rs14.7bn.
JSW Steel: We expect steel sales volumes of 1.64MT (+3% q/q; +8% y/y) with
ASPs higher by Rs3200/MT driven by the strong pricing trend in flat steel products
in Jan-Feb. While raw material costs will be higher q/q, we believe that the company
will see the benefit from the inventory of the lower cost raw material contracts in the
3Q (companies would have 1-1.5month RM inventory of previous quarter contract).
Therefore, in our view, JSW's standalone EBITDA/MT could be strong at $210/MT,
which would be the highest since 2QFY09. We forecast consolidated EBITDA of
Rs15.7bn (19% y/y; 55% q/q) and net profit of Rs6.6bn (+9% y/y). JSW should also
benefit from the iron ore ban in Karnataka (it will be lifted on April 20) as domestic
iron ore costs, in our view, would be lower.
Non-Ferrous – Higher LME likely offset by higher costs
Sterlite Industries: We expect consolidated EBITDA at Rs22.0bn (+0.5% y/y;
+11% q/q) primarily driven by higher LME prices during the quarter. As seen in
Table 2, LME prices increased 4-12% sequentially. Zinc segment would see
improvement from recovery in lead production (impacted in 3Q from the planned
maintenance shutdown at the Ausmelt and Pyro smelters) and also contribution from
the completed Anglo zinc asset acquisition. Aluminum operations should remain
weak, while power sales should not see much of a ramp up.
Hindalco (standalone): We expect Hindalco to report Rs8.6bn of EBITDA (3% y/y;
16% q/q), mainly on the back of higher LME aluminum prices and improvement in
production. We expect aluminium production to improve 7% q/q, given the floods
and fire that impacted production in 2Q-3Q. Production cost would also be higher
during the quarter due to higher coal and carbon costs. Copper production levels to
improve from 3Q levels.
Nalco: We expect Nalco to report 4QFY11 EBITDA of Rs4.5bn (+16% q/q) and
PAT of Rs3.0bn. We expect production to remain flat at 111kt but expect improved
realizations (+7% q/q) from higher LME.
Mining Earnings Preview
Coal India: We expect volume sales to improve (+10% q/q) with high rake
availability and increased e-auction volumes. ASPs should see some benefit from the
price hikes taken in late-Feb for MCL production and differential pricing for sectors
other than power, defense and fertilizers. We expect ASPs to increase 9% q/q, which
will also be aided by improvement in e-auction premiums. We are estimating CIL’s
EBITDA at Rs52.6bn (vs. Rs34.5bn in 3Q) and PAT of Rs41.5bn (vs. Rs26.3bn in
3Q) in the quarter.
MOIL: Volumes would improve sharply from the 3Q levels and we expect sales of
360kt (below the implied volume of 410kt based on volume guidance of 1.15MT for
FY11). However, we are estimating a 7% q/q decline Mn ore realizations, given the
weak global pricing trends and inventory destocking. We are estimating 4QFY11
EBITDA at Rs2.2bn (+40% q/q) and PAT at Rs1.7bn.
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