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METALS & MINING (NEGATIVE OUTLOOK)
Steel
(i) While steel price hikes since Dec'10 was captured in Q4FY11result, Q1FY12e saw
little softening of prices (>Rs.750/t Q/Q). Impact of sharp jump in key raw material
prices would just start to flow in Q1FY12e but full impact of raw material price hike
would be seen in Q2FY12e only as most companies were still carrying 1.5-2 months
of raw material inventory. So while we would see beginning of operating margin
compression in Q1FY12e but the margins would be severely squeezed in Q2FY12e.
(ii) Domestic steel consumption growth has slowed down to a mere ~2% Y/Y in Q1
FY12e against a production increase of ~8% Y/Y. Steel volumes are expected to
decline on a Q/Q basis on account of seasonal factors and slowing domestic steel
consumption but its likely that listed large steel producers might still see muted Y/Y
growth on low base and gaining market share against fragmented small steel producers.
Non-ferrous metals
n LME average aluminium prices for Q1FY12e were up 23%Y/Y and 3.6%Q/Q;
LME average zinc prices for Q1FY12e were up 10.9%Y/Y but down 5.4%Q/Q;
LME average copper prices for Q1FY12e were up 30.6%Y/Y but down 4.1%Q/Q.
n LME average inventory levels for aluminium have been stable as up just ~2%Y/
Y and Q/Q; LME average inventory levels for zinc have been growing alarmingly,
up by massive 41.7%Y/Y and 15.1%Q/Q; LME average inventory levels for copper
are down 4.2Y/Y but up sharply by 14% on Q/Q basis.
n Power costs for aluminium producers would rise substantially in Q1FY12e as
sharp hike in coal prices by Coal India would be impacting from Q1 onwards.
n For zinc producers, fall in price realisations coupled with increase in coal costs
from this quarter onwards would lead to margin compression.
n Copper TC/RC realisations had shot up since March 2011, post closure of large
smelting capacity in Japan due to natural calamity. This would lead to substantial
improvement in earnings for Indian copper smelters.
n Silver prices have corrected sharply over last two months or so but average
realisations are still better on Q/Q basis and much better on Y/Y basis.
n As QE2 in US has ended on 30 June 2011, we expect reasonable correction in
LME base metal prices and precious metal prices in Q2FY12e. This should lead to
lower earnings by base metal companies in next quarter and hence decent earning
performance for Q1FY12e might not help much to support stock prices.
Mining
n Coal producers would see significant improvement in earnings on Q/Q basis as
full benefit of coal price hikes by Coal India would be realised from Q1FY12e onwards.
But good results might be already in stock prices post stupendous returns
over last four months. There are market expectations of further coal price hike
by Coal India in near term to neutralize expected increase in labour costs from
July 2011 onwards. However, we believe coal price hike might be few months
away and this might lead to coal company stock prices underperforming despite
very good results likely for Q1FY12e.
n Iron ore spot export prices have been reasonably stable (down 2-3% Q/Q) but
there has been sharp fall in volumes due to continued restrictions of exports from
Karnataka. Timely arrival of monsoon would also impact Q1FY12e volumes.
Weak seasonality in Q2 due to monsoons would mean no near term stock out
performance would be probable in next two months.
Sesa Goa
n Sesa Goa iron ore sales volume for FY12e is expected to fall sharply by 17.5%Y/
Y and 40%Q/Q to 4.5mn tonnes. The sharp fall is attributed to (a) lapse of sales
from Orissa (b) failure of restarting of exports from Karnataka and (c) timely arrival
of monsoon in Goa.
n Sesa Goa average iron ore sales realizations is expected to moderate to $100/
tonne down ~3% Q/Q (but up 9% Y/Y) as iron ore spot export prices have held
firm at higher levels. EBITDA margins would fall on sharp increase in export duty
and freight charges.
n For Q1FY12e, Sesa Goa is expected to report (a) Net Sales of Rs.22.47bn down
38% Q/Q and 6.9%Y/Y; (b) EBITDA margin of 53% down 550bps Q/Q and
1130bps Y/Y; (c)EBITDA of Rs.11.9bn down 43.8% Q/Q and 23.2%Y/Y; (d) EPS
of Rs.9.66 down 43.2%Q/Q and 36.2%Y/Y.
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