Conversations with investors; INR down 4% against USD is positive for Indian Metals ::JPMorgan

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 Who is less bearish: Generally over the last 2 weeks our conversations with
investors indicate that on the margin, local Indian funds are relatively less
bearish than their foreign counterparts on Indian Metals and Mining (MM)
equities. For example, on our recent TATA Steel many foreign investors
argued that our worst case assumption for TATA ($250/MT EBITDA in India
and $20/MT at Europe) was far too optimistic, while local investors were not as
bearish. Arguably it could also be driven by lower redemption issues at the local
funds (we do not have multiple data points to prove this conjecture). For
example, as per Bloomberg, state insurance company, LIC, acquired 0.94Mn
shares in TATA in August 12th, taking the stake to 14.06%.
 Why are India MM equities falling more than the regional/global peers?
Indian MM equities have sharply underperformed global and regional peers. For
example, TATA initially declined in-sync with European/US Steel companies,
and even when the latter saw some upward movement, TATA continued to fall
with volumes increasing. HNDL which has 60% of EBITDA not exposed to
LME, has sharply underperformed peers, and similar to TATA in recent days,
the large declines have come on higher volumes. In our view there are 2 possible
reasons for this underperformance: a) India YTD has underperformed most of
the Asian markets (down 21%) and b) There are decently large ETF holdings in
many of the frontline Indian MM equities as per Bloomberg holding data.
Additionally as we have highlighted in our FII v/s DII ownership patters,
HNDL had the highest level of FII ownership through this year so far, while
TATA saw increased FII ownership post the equity issuance earlier this
year. We believe some of the sharp underperformance, particularly of
TATA/HNDL can be attributed to possible ETF led selling and relatively large
FII ownership.
 Currencies become important again: Since the equity sell off started, INR has
depreciated by 4% (from end July). For Indian MM companies which work
on import parity model, this is equivalent to a 4% increase in underlying
commodity price. We would watch this very closely as on balance currency
depreciation against the USD is positive for Indian MM companies.
 2008 v/s 2011: Compared to the declines in Base, bulks have held up so far.
Looking at the 2008 crash, LME copper started to fall from August 2008 (peak
price of $7169/MT) and over the next 45 days fell 15% (15th Sept 2008), then
stabilized for some days, after which the crash picked up pace and LME copper
fell 46% over the next 30 days (25th Oct 2008) after which it stabilized again for
some days and the last 25% fall to hit trough price of $2835/MT was over 2
month period (24th Dec 2008). Spot iron ore in the first phase of correction
did not fall till August 25th 2008 and then over the next 20 days fell 27%.
The fall in spot iron ore increased and spot prices fell 50% over the next 2
months to hit a low of $65/MT in Nov 2008 and after that prices started to
increase. So far in 2011, LME copper in eerily similar timelines like 2008,
started falling from August 1st and is down 11% so far. Spot iron ore prices
have moved up 1% in the same timeframe. Admittedly bulks are less liquid
than base, and hence a correction could happen over a shorter period of
time on actual transactions, however compared to 2008, India’s exports are
significantly lower, while China’s imports are much higher (334MT in
H1CY11 v/s 230MT in H1 2008).