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We expect that steel margins will be subdued on the back of high cost inflation and stable
pricing, but that non-ferrous companies will post strong earnings. Hindalco, Hindustan Zinc
and Jindal Steel and Power are our top picks.
Steel: margins likely under pressure from muted prices and higher raw material costs
We expect soft qoq pricing in 1Q as demand has weakened due to rising interest rates.
According to the Steel Ministry, India’s steel consumption rose just 1.9% yoy in April-May.
We forecast EBITDA/tonne of US$160 for JSW Steel and US$108 for SAIL. We expect Tata
Steel’s domestic operations to report robust EBITDA/tonne of US$356 given its strong
backward integration. We forecast that Jindal Steel and Power (JSP) will report steady
earnings on the back of surplus pellet sales, a high plant load factor (PLF) of 1,000MW
merchant power and stable steel operations that are relatively insulated from coking coal.
Non-ferrous: strong LME prices may offset cost inflation; Miners: robust realisations
Aluminium prices rose 4% qoq and 24% yoy during the quarter. This should aid Hindalco’s
domestic operations even as we expect Novelis to report robust EBITDA of US$275m. We
expect Hindustan Zinc (HZ) to report strong earnings aided by sales of concentrates as the
new 100kt lead smelter is yet to be commissioned. Volumes for Sesa Goa and Coal India are
likely to be soft as a result of logistical issues although we expect realisations to be strong.
However, we think NMDC will post robust volumes of 8.2m tonnes but see pressure on
realisations from lower export volumes.
Hindalco, Hindustan Zinc and Jindal Steel and Power are our top picks
Despite the delay in Hindalco’s greenfield expansion plans, we believe its existing business is
available at a discount, with Novelis continuing to outperform and the continuing rally in
aluminium aiding its domestic operations. We expect silver volumes and HZN’s imminent
commissioning of a lead smelter to aid both HZN and Sterlite earnings in FY12. We also expect
Sterlite to be aided by power volumes, although coal costs will likely keep margins in check. We
anticipate that JSP will be the only company in the steel space to report earnings growth in FY12,
given its relative insulation from coking coal costs. However, we think steel pricing could become
buoyant again towards the end of the year on the back of elevated cost pressures. We have Buy
ratings on Hindalco, HZN, Sterlite, NMDC, Sesa, Tata Steel and JSP, a Hold on Nalco and Sells
on Coal India, JSW Steel and SAIL
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