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Project delays hurting
A spate of project delays has ensured that most of the metals sector
expansion projects have been delayed from FY12 to FY13. This means
that the project-related spurt in earnings will show only in the FY14-15
period for most companies. We see low risk of further delays in case of
Tata and JSW but see higher risk of more delays in case of SAIL, JSPL,
Hindalco and Sterlite. We believe that the market will not assign much
value to projects till visibility on timely commissioning improves. We
expect stocks to trade on the basis of FY12-13 earnings growth and the
level of risk to the same. Our top pick is Tata Steel, after which we like
JSPL, JSW Steel and Coal India (neutral between the three).
Project delays across the board
q The last 12 months have seen most Indian metal companies announcing delays in
their expansion projects ranging from 3m to 15m.
q These are projects where most approvals, land, funding and equipment ordering is
in place. The delays have been mostly caused by slower execution.
q These project delays and the resultant earnings cuts by the street have been a key
reason why almost the entire metals space has underperformed in 2011.
Lower probability of further delays in case of JSW and Tata
q JSW Steel: JSW’s expansion to 11 mtpa from 7.8 mtpa has seen a 3m delay to
Jun-11. However, given imminent commissioning, we see low risk of delays here.
q Tata Steel: Tata’s expansion at Jamshedpur to 9.7mtpa from 6.8mtpa has already
seen a 12m delay to Mar-12. We see low risk of a further delay.
Higher probability of delays in SAIL, JSPL, Hindalco & Sterlite
q SAIL: SAIL is targeting commissioning of its brownfield expansions across plants by
Mar-13 and has not changed this timeline in the last year. However, given the
delays in the private sector companies, we are sceptical of SAIL’s expansions
completing on time and expect a delay of 6m-12m.
q JSPL: The 1350MW power capacity in JSPL stand-alone is expected to get fully
commissioned by Jun-12 (delay of 3m). We don’t see much risk of a further delay
here. However, the greenfield Angul steel plant - which has already seen a delay of
9m to Oct-12 - might get delayed further.
q Hindalco: The Utkal refinery, Mahan smelter and Aditya smelter projects have
already been delayed by 3-15 months. Given Hindalco’s bleak commentary on the
challenges it is facing with these projects, we expect delays of 6m ahead.
q Sterlite: The VAL, Balco and copper expansions have been deferred and we expect
some delays in the power capacity expansions of Sterlite Energy and Balco.
Eventual value is still there but unlikely to be realized soon
q If we value all the stocks on an eventual capacity basis and discount the value back
to FY12-end at a discount rate of 12.5%, we see higher upside in case of Tata
(42%), SAIL (55%) and Bhushan (57%) and lower upside in case of JSPL (15%),
Hindalco (15%) and Sterlite (19%).
q However, given macro and execution uncertainties, we don’t expect the market to
assign value to these projects anytime soon.
Preferred picks – Tata Steel, JSPL, JSW Steel, Coal India
q We believe that stocks, which have a higher level of assured earnings growth over
FY12-13 will fare relatively better in balance 2011 as compared to those with lower
near-term earnings growth and with risk of more project delays.
q Tata Steel is our top pick in the sector given the India expansion and start of
production in overseas mines by Mar-12.
q After Tata, we are neutral between JSW, JSPL and Coal India. JSW and JSPL have
strong earnings growth over FY12-13 coming from projects with lower risk of delays
while Coal India will benefit from higher volumes and prices in FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Project delays hurting
A spate of project delays has ensured that most of the metals sector
expansion projects have been delayed from FY12 to FY13. This means
that the project-related spurt in earnings will show only in the FY14-15
period for most companies. We see low risk of further delays in case of
Tata and JSW but see higher risk of more delays in case of SAIL, JSPL,
Hindalco and Sterlite. We believe that the market will not assign much
value to projects till visibility on timely commissioning improves. We
expect stocks to trade on the basis of FY12-13 earnings growth and the
level of risk to the same. Our top pick is Tata Steel, after which we like
JSPL, JSW Steel and Coal India (neutral between the three).
Project delays across the board
q The last 12 months have seen most Indian metal companies announcing delays in
their expansion projects ranging from 3m to 15m.
q These are projects where most approvals, land, funding and equipment ordering is
in place. The delays have been mostly caused by slower execution.
q These project delays and the resultant earnings cuts by the street have been a key
reason why almost the entire metals space has underperformed in 2011.
Lower probability of further delays in case of JSW and Tata
q JSW Steel: JSW’s expansion to 11 mtpa from 7.8 mtpa has seen a 3m delay to
Jun-11. However, given imminent commissioning, we see low risk of delays here.
q Tata Steel: Tata’s expansion at Jamshedpur to 9.7mtpa from 6.8mtpa has already
seen a 12m delay to Mar-12. We see low risk of a further delay.
Higher probability of delays in SAIL, JSPL, Hindalco & Sterlite
q SAIL: SAIL is targeting commissioning of its brownfield expansions across plants by
Mar-13 and has not changed this timeline in the last year. However, given the
delays in the private sector companies, we are sceptical of SAIL’s expansions
completing on time and expect a delay of 6m-12m.
q JSPL: The 1350MW power capacity in JSPL stand-alone is expected to get fully
commissioned by Jun-12 (delay of 3m). We don’t see much risk of a further delay
here. However, the greenfield Angul steel plant - which has already seen a delay of
9m to Oct-12 - might get delayed further.
q Hindalco: The Utkal refinery, Mahan smelter and Aditya smelter projects have
already been delayed by 3-15 months. Given Hindalco’s bleak commentary on the
challenges it is facing with these projects, we expect delays of 6m ahead.
q Sterlite: The VAL, Balco and copper expansions have been deferred and we expect
some delays in the power capacity expansions of Sterlite Energy and Balco.
Eventual value is still there but unlikely to be realized soon
q If we value all the stocks on an eventual capacity basis and discount the value back
to FY12-end at a discount rate of 12.5%, we see higher upside in case of Tata
(42%), SAIL (55%) and Bhushan (57%) and lower upside in case of JSPL (15%),
Hindalco (15%) and Sterlite (19%).
q However, given macro and execution uncertainties, we don’t expect the market to
assign value to these projects anytime soon.
Preferred picks – Tata Steel, JSPL, JSW Steel, Coal India
q We believe that stocks, which have a higher level of assured earnings growth over
FY12-13 will fare relatively better in balance 2011 as compared to those with lower
near-term earnings growth and with risk of more project delays.
q Tata Steel is our top pick in the sector given the India expansion and start of
production in overseas mines by Mar-12.
q After Tata, we are neutral between JSW, JSPL and Coal India. JSW and JSPL have
strong earnings growth over FY12-13 coming from projects with lower risk of delays
while Coal India will benefit from higher volumes and prices in FY12.
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