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Steel companies should see margin expansion in 4QFY11F with prices hiked at the turn of
the new year. But, this will be temporary as higher coking coal prices flow through in 1Q and
2QFY12. Non-ferrous companies should post robust earnings as they continue to ride the
strength of underlying commodity prices.
Steel – some respite before the margin squeeze in 1Q and 2QFY12
Domestic steel majors have all increased prices more than once since December 2010 to
make up for the rise in raw material prices. We expect average realisations to have risen by
Rs2,000-2,700/t qoq. This should reflect positively on steel majors’ margins with coking coal
contract prices for 4QFY11 at US$225/t, compared to US$209/t for the December quarter.
With 1QFY12 contract prices at about US$330/t, we expect 1Q and 2QFY12 to be
particularly challenging as these are also seasonally weaker from a demand standpoint.
Non-ferrous – to ride strength in LME prices; Coal – volume issues persist
Average spot LME prices of aluminium, zinc and lead have increased 4-9% qoq. The
average price for aluminium was US$2,499/t (+7% qoq, +16% yoy), zinc was US$2,397/t
(+4% qoq, +5% yoy), lead was US$2,602/t (+9% qoq, +18% yoy). This should reflect
positively on earnings of Hindalco, Sterlite, Hindustan Zinc and Nalco. We expect Coal India
dispatches of 118mt for the quarter, constrained by shortage of rakes. However, the price
hike announced at end-February should have a positive impact, though it will flow through
fully only from 1QFY12. We estimate adjusted EBITDA of Rs58bn for Coal India in 4QFY11.
Hindalco, Jindal Steel and Power, Hindustan Zinc our preferred picks
4QFY11 should see a temporary rise in margins for steel companies due to the price hikes,
but we expect peak coking coal prices to hurt in 1Q and 2QFY12, especially for the nonintegrated
JSW Steel and SAIL. JSP and Tata Steel India should be relatively insulated due
to 50% captive integration. Sesa Goa should still benefit from higher realisations even as it faces
volume and regulatory constraints (higher export duty, freight etc). In the non-ferrous space,
Hindalco is progressing on its expansion plans. It has financial closure on its 359kt Mahan
smelter and expects to tie up funds for the 359kt Aditya aluminium project in 1QFY12.
Fundamentals look weak for zinc, with exchange inventories at 16-year highs, but we find HZN’s
valuation attractive, as it should see strong earnings contribution from silver in future (16moz
capacity by FY12). We have Buys on Hindalco, HZN, Sterlite, Jindal Steel and Power (our
preferred pick in the steel space), Tata Steel and Sesa Goa. We have Holds on SAIL and Nalco
and Sells on Coal India and JSW Steel.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel companies should see margin expansion in 4QFY11F with prices hiked at the turn of
the new year. But, this will be temporary as higher coking coal prices flow through in 1Q and
2QFY12. Non-ferrous companies should post robust earnings as they continue to ride the
strength of underlying commodity prices.
Steel – some respite before the margin squeeze in 1Q and 2QFY12
Domestic steel majors have all increased prices more than once since December 2010 to
make up for the rise in raw material prices. We expect average realisations to have risen by
Rs2,000-2,700/t qoq. This should reflect positively on steel majors’ margins with coking coal
contract prices for 4QFY11 at US$225/t, compared to US$209/t for the December quarter.
With 1QFY12 contract prices at about US$330/t, we expect 1Q and 2QFY12 to be
particularly challenging as these are also seasonally weaker from a demand standpoint.
Non-ferrous – to ride strength in LME prices; Coal – volume issues persist
Average spot LME prices of aluminium, zinc and lead have increased 4-9% qoq. The
average price for aluminium was US$2,499/t (+7% qoq, +16% yoy), zinc was US$2,397/t
(+4% qoq, +5% yoy), lead was US$2,602/t (+9% qoq, +18% yoy). This should reflect
positively on earnings of Hindalco, Sterlite, Hindustan Zinc and Nalco. We expect Coal India
dispatches of 118mt for the quarter, constrained by shortage of rakes. However, the price
hike announced at end-February should have a positive impact, though it will flow through
fully only from 1QFY12. We estimate adjusted EBITDA of Rs58bn for Coal India in 4QFY11.
Hindalco, Jindal Steel and Power, Hindustan Zinc our preferred picks
4QFY11 should see a temporary rise in margins for steel companies due to the price hikes,
but we expect peak coking coal prices to hurt in 1Q and 2QFY12, especially for the nonintegrated
JSW Steel and SAIL. JSP and Tata Steel India should be relatively insulated due
to 50% captive integration. Sesa Goa should still benefit from higher realisations even as it faces
volume and regulatory constraints (higher export duty, freight etc). In the non-ferrous space,
Hindalco is progressing on its expansion plans. It has financial closure on its 359kt Mahan
smelter and expects to tie up funds for the 359kt Aditya aluminium project in 1QFY12.
Fundamentals look weak for zinc, with exchange inventories at 16-year highs, but we find HZN’s
valuation attractive, as it should see strong earnings contribution from silver in future (16moz
capacity by FY12). We have Buys on Hindalco, HZN, Sterlite, Jindal Steel and Power (our
preferred pick in the steel space), Tata Steel and Sesa Goa. We have Holds on SAIL and Nalco
and Sells on Coal India and JSW Steel.
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