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India: Metals & Mining
Equity Research
Weak macro outlook adds to commodity woes; JSPL most resilient
Rising domestic/global macro risks lead to commodity price cuts
The Indian Metals & Mining sector has on an average underperformed the
BSE Sensex by 18% YTD. In our view, this has largely been driven by
domestic macro concerns (high inflation, monetary tightening), sectorspecific
regulatory concerns (implications of draft mining bill, project
permitting delays) and a weakening of global macro sentiment (European
sovereign debt crisis, US slowdown and lower global growth forecasts).
Weak demand environment drives downward price revisions
Our colleagues at GS&PA have revised down commodity price
assumptions in sync with lower global growth forecast by our ECS team.
We incorporate these lower commodity price assumptions for our
coverage group. Aluminium pricing has been trending lower as supply
outpaces demand and inventories mount. For zinc, rising inventories
remain of concern and LME stocks of zinc are now at a 16-year high. The
copper market is closely balanced, given supply constraints and demand
weakness. Iron ore markets remain tight due to a continued surge in
Chinese steel output and constrained supplies. We revise our FY12-FY14
EPS estimates by -0.1% to -36% and our TPs by -7% to -20%, incorporating
these changes. Key risks for our sector coverage: volatility in commodity
prices, slower-than-expected demand recovery, delays in growth projects.
Jindal Steel & Power (CL-Buy) least vulnerable to macro risks
In our view, JSPL is best positioned to benefit from a potential hard
landing, given its diverse business mix, margin resilience over cycles, bestin-
class resource ownership (for steel and power) and robust balance
sheet. The company has a strong earnings trajectory (we expect 31%
FY12-FY14 CAGR) and attractive valuation (trading near trough levels on
both a P/B and a P/E basis). Our revised SOTP-based 12-month target price
of Rs 745 implies upside of 44%.
Reiterate Buy on JSW Steel, Tata Steel and Sterlite
Our other top picks are Tata Steel (12-month P/B-based target price revised
to Rs600 from Rs688; Buy rating retained), Sterlite Industries (12-month
SOTP-based target price revised to Rs164 from Rs205; Buy rating retained),
and JSW Steel (12-month P/B-based target price revised to Rs803 from
Rs909; Buy rating retained).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Metals & Mining
Equity Research
Weak macro outlook adds to commodity woes; JSPL most resilient
Rising domestic/global macro risks lead to commodity price cuts
The Indian Metals & Mining sector has on an average underperformed the
BSE Sensex by 18% YTD. In our view, this has largely been driven by
domestic macro concerns (high inflation, monetary tightening), sectorspecific
regulatory concerns (implications of draft mining bill, project
permitting delays) and a weakening of global macro sentiment (European
sovereign debt crisis, US slowdown and lower global growth forecasts).
Weak demand environment drives downward price revisions
Our colleagues at GS&PA have revised down commodity price
assumptions in sync with lower global growth forecast by our ECS team.
We incorporate these lower commodity price assumptions for our
coverage group. Aluminium pricing has been trending lower as supply
outpaces demand and inventories mount. For zinc, rising inventories
remain of concern and LME stocks of zinc are now at a 16-year high. The
copper market is closely balanced, given supply constraints and demand
weakness. Iron ore markets remain tight due to a continued surge in
Chinese steel output and constrained supplies. We revise our FY12-FY14
EPS estimates by -0.1% to -36% and our TPs by -7% to -20%, incorporating
these changes. Key risks for our sector coverage: volatility in commodity
prices, slower-than-expected demand recovery, delays in growth projects.
Jindal Steel & Power (CL-Buy) least vulnerable to macro risks
In our view, JSPL is best positioned to benefit from a potential hard
landing, given its diverse business mix, margin resilience over cycles, bestin-
class resource ownership (for steel and power) and robust balance
sheet. The company has a strong earnings trajectory (we expect 31%
FY12-FY14 CAGR) and attractive valuation (trading near trough levels on
both a P/B and a P/E basis). Our revised SOTP-based 12-month target price
of Rs 745 implies upside of 44%.
Reiterate Buy on JSW Steel, Tata Steel and Sterlite
Our other top picks are Tata Steel (12-month P/B-based target price revised
to Rs600 from Rs688; Buy rating retained), Sterlite Industries (12-month
SOTP-based target price revised to Rs164 from Rs205; Buy rating retained),
and JSW Steel (12-month P/B-based target price revised to Rs803 from
Rs909; Buy rating retained).
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