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Metals & Mining
India
Constructive on non-ferrous names after recent correction. BUY HZ and STLT.
Metals stocks have suffered from external shocks of downgrade of the US sovereign
credit rating, Eurozone debt crisis and negative surprises on growth in the developed
market. Against the backdrop of broad negatives, we run sensitivities and evaluate nonferrous
stocks on various parameters. We pick Hindustan Zinc and Sterlite as stocks
which can deliver strong returns from the current levels. We have made a few
adjustments to our commodity price assumptions, earnings and target prices.
External shocks hurt commodity prices
A series of bad news has hurt metal stocks, including (1) S&P’s decision to lower the US sovereign
credit rating, (2) Eurozone debt crisis, (3) faltering growth rates with downgrade of GDP growth
projections and (4) concerns on overheating of the Chinese economy. Copper prices have declined
by 7%, zinc by 8%, lead by 7% and aluminium by 5% ever since the US debt rating downgrade.
Trade, however, has been remarkably calm in the physical market will little spike in inventory levels.
Aluminium has the least amount of price downside
Aluminium is relatively well-protected from high and increasing cash cost of production in China
and has relatively lower downside to prices. While absolute inventories are high, it has been
flattish over the past few months with most of the inventory stuck in warehousing deals. We
expect aluminium to trade in a range of US$2,300-2,500/ tonne, broadly at the cost of marginal
production of Chinese smelters. We have retained our aluminium price for FY2012E of US$2,400/
tonne and lower FY2013E price to US$2,400/ tonne from US$2,450/ tonne earlier.
Zinc—surplus likely in 2011E; exchange inventories at a new high
Zinc suffers from production surplus and increasing inventory (9.8 weeks). However, the recent
sell-off has brought zinc prices down to marginal cost of marginal production. Further correction
in zinc prices may lead to closure of mines by price-sensitive swing producers in China. We expect
zinc prices to be subdued in the near term and move in a band of US$2,100-2,300/ tonne. Our
price forecast is at the cost of marginal production in China. We lower zinc price forecast to
US$2,150 and US$2,200/ tonne for FY2012-13E from US$2,300 and US$2,350/ tonne earlier.
Significant upside despite estimate changes; HZ and STLT preferred picks
We cut HZ earnings estimate by 5.1%/7.6% for FY2012/13E on the back of change in our zinc
and lead price assumptions. We also lower TP to Rs160 from Rs170 earlier. Cut in zinc prices also
impacts our estimates for STLT; we lower the same to Rs17/Rs19 for FY2012/13E from
Rs18/Rs20.7 earlier. We lower STLT fair value to Rs185 from Rs205 earlier. We cut our TP for
Hindalco to Rs180 from Rs200 earlier on marginal change in aluminium prices and normalization
of multiples for all businesses. NALCO TP reduces to Rs65, down from Rs70 earlier. Exhibit 7
summarizes estimate changes for the non-ferrous names.
STLT trading at distressed valuations, HZ at attractive one
We find STLT and HZ extremely attractive at the current levels. HZ stock implies zinc/ lead price of
US$1,700/ tonne, a distress scenario in our view. Strong balance sheet, volumes growth and
steady silver income stream makes HZ our preferred pick. Current valuations of Sterlite can be
explained by the zinc business alone (CMP of HZ without holdco discount + fair value for Zinc
international); effectively no value is assigned to excess cash, copper, Balco and power business.
Sterlite and HZ are our top picks in the metals space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
Constructive on non-ferrous names after recent correction. BUY HZ and STLT.
Metals stocks have suffered from external shocks of downgrade of the US sovereign
credit rating, Eurozone debt crisis and negative surprises on growth in the developed
market. Against the backdrop of broad negatives, we run sensitivities and evaluate nonferrous
stocks on various parameters. We pick Hindustan Zinc and Sterlite as stocks
which can deliver strong returns from the current levels. We have made a few
adjustments to our commodity price assumptions, earnings and target prices.
External shocks hurt commodity prices
A series of bad news has hurt metal stocks, including (1) S&P’s decision to lower the US sovereign
credit rating, (2) Eurozone debt crisis, (3) faltering growth rates with downgrade of GDP growth
projections and (4) concerns on overheating of the Chinese economy. Copper prices have declined
by 7%, zinc by 8%, lead by 7% and aluminium by 5% ever since the US debt rating downgrade.
Trade, however, has been remarkably calm in the physical market will little spike in inventory levels.
Aluminium has the least amount of price downside
Aluminium is relatively well-protected from high and increasing cash cost of production in China
and has relatively lower downside to prices. While absolute inventories are high, it has been
flattish over the past few months with most of the inventory stuck in warehousing deals. We
expect aluminium to trade in a range of US$2,300-2,500/ tonne, broadly at the cost of marginal
production of Chinese smelters. We have retained our aluminium price for FY2012E of US$2,400/
tonne and lower FY2013E price to US$2,400/ tonne from US$2,450/ tonne earlier.
Zinc—surplus likely in 2011E; exchange inventories at a new high
Zinc suffers from production surplus and increasing inventory (9.8 weeks). However, the recent
sell-off has brought zinc prices down to marginal cost of marginal production. Further correction
in zinc prices may lead to closure of mines by price-sensitive swing producers in China. We expect
zinc prices to be subdued in the near term and move in a band of US$2,100-2,300/ tonne. Our
price forecast is at the cost of marginal production in China. We lower zinc price forecast to
US$2,150 and US$2,200/ tonne for FY2012-13E from US$2,300 and US$2,350/ tonne earlier.
Significant upside despite estimate changes; HZ and STLT preferred picks
We cut HZ earnings estimate by 5.1%/7.6% for FY2012/13E on the back of change in our zinc
and lead price assumptions. We also lower TP to Rs160 from Rs170 earlier. Cut in zinc prices also
impacts our estimates for STLT; we lower the same to Rs17/Rs19 for FY2012/13E from
Rs18/Rs20.7 earlier. We lower STLT fair value to Rs185 from Rs205 earlier. We cut our TP for
Hindalco to Rs180 from Rs200 earlier on marginal change in aluminium prices and normalization
of multiples for all businesses. NALCO TP reduces to Rs65, down from Rs70 earlier. Exhibit 7
summarizes estimate changes for the non-ferrous names.
STLT trading at distressed valuations, HZ at attractive one
We find STLT and HZ extremely attractive at the current levels. HZ stock implies zinc/ lead price of
US$1,700/ tonne, a distress scenario in our view. Strong balance sheet, volumes growth and
steady silver income stream makes HZ our preferred pick. Current valuations of Sterlite can be
explained by the zinc business alone (CMP of HZ without holdco discount + fair value for Zinc
international); effectively no value is assigned to excess cash, copper, Balco and power business.
Sterlite and HZ are our top picks in the metals space.
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