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Against a backdrop of lower global GDP growth rates, we analyse the potential impact on
earnings and valuations of a lower-growth scenario. We find SAIL, Nalco and JSW Steel would
be most adversely affected. Coal India, Sesa Goa and Jindal Steel and Power would be the least
affected, on our estimates.
Background to our analysis
Many commentators are beginning to suggest that Europe and the US could tip into recession
later this year and into next year. We see a realistic possibility of the outlook for global GDP
growth in 2012 becoming much worse than the IMF’s near 4% estimate published last week. We
highlight our current EPS forecasts for 2012 vs an EPS forecast that would accommodate a
material slowdown under this bear-case scenario. We estimate potential recession valuations
were this scenario to materialise.
Valuation approach: today and under a recessionary outlook
We generally value our companies at an EV/EBITDA multiple that is based on an average for
their global peers. However, for companies such as Coal India and NMDC whose earnings are
fairly stable, we use a DCF-approach. With an expected drop in earnings, one would expect
valuation multiples to expand, but we find the reverse is actually true as risk aversion increases.
We reduce our multiples by 20% on the lower estimates for the bear scenario.
Free cash flow variance
Under our bear-case scenario, we calculate an average drop in earnings of 27% for the
companies in our sector coverage universe. We expect no significant changes to capex
programmes at this stage. However, if there is a long recession, SAIL, Tata Steel, Hindalco and
JSW Steel might be forced to delay some of their expansion plans.
Balance-sheet vulnerability
From a balance-sheet perspective, compared to the last recession, companies such as Tata
Steel and JSW Steel have improved their capital base through capital raising and divestments. In
the case of Hindalco, Novelis has shown a sharp turnaround in its operations. Also, companies
such as Coal India, NMDC, Hindustan Zinc, NALCO are significantly cash rich.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Against a backdrop of lower global GDP growth rates, we analyse the potential impact on
earnings and valuations of a lower-growth scenario. We find SAIL, Nalco and JSW Steel would
be most adversely affected. Coal India, Sesa Goa and Jindal Steel and Power would be the least
affected, on our estimates.
Background to our analysis
Many commentators are beginning to suggest that Europe and the US could tip into recession
later this year and into next year. We see a realistic possibility of the outlook for global GDP
growth in 2012 becoming much worse than the IMF’s near 4% estimate published last week. We
highlight our current EPS forecasts for 2012 vs an EPS forecast that would accommodate a
material slowdown under this bear-case scenario. We estimate potential recession valuations
were this scenario to materialise.
Valuation approach: today and under a recessionary outlook
We generally value our companies at an EV/EBITDA multiple that is based on an average for
their global peers. However, for companies such as Coal India and NMDC whose earnings are
fairly stable, we use a DCF-approach. With an expected drop in earnings, one would expect
valuation multiples to expand, but we find the reverse is actually true as risk aversion increases.
We reduce our multiples by 20% on the lower estimates for the bear scenario.
Free cash flow variance
Under our bear-case scenario, we calculate an average drop in earnings of 27% for the
companies in our sector coverage universe. We expect no significant changes to capex
programmes at this stage. However, if there is a long recession, SAIL, Tata Steel, Hindalco and
JSW Steel might be forced to delay some of their expansion plans.
Balance-sheet vulnerability
From a balance-sheet perspective, compared to the last recession, companies such as Tata
Steel and JSW Steel have improved their capital base through capital raising and divestments. In
the case of Hindalco, Novelis has shown a sharp turnaround in its operations. Also, companies
such as Coal India, NMDC, Hindustan Zinc, NALCO are significantly cash rich.
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