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Metals & Mining
India
Stay positive, underscore near-term pain. We fine-tune our commodity forecast for
FY2012-14E. Continued uncertainty on sovereign debt crisis in Eurozone, global
slowdown and weak financial sentiment may weigh on base metals prices. However,
the prices are supported by the fact that many commodities are trading well below
marginal cost of production. We cut aluminium price forecast to US$2,225-2,450/tonne
and zinc to US$2,025-2,300/tonne for FY2012-14E. We cut EPS estimates of nonferrous
names by 2-9% for FY2012-14E but maintain positive view on attractive
valuations. HZ is our top pick.
Aluminium—30% of smelting capacity losing money at current LME
We cut FY2012E and FY2013E aluminium price forecast by 2.2% and 2.1% to US$2,225 and
US$2,350, respectively. We retain our price forecast for FY2014E. Aluminium prices have corrected
by 26% in the past four months and since the sovereign debt crisis in Europe emerged. Current
LME prices of US$2,059/tonne are eating into the cost curve. CRU estimates that 30% of smelters
are losing money, of which 75% are Chinese producers. COP for Chinese producers may increase
further due to the proposed power tariff increase in China.
However, this will not result in immediate cut in production; in fact, many producers are still
looking at improving performance of assets and expanding existing capacity. Even as LME price is
eating into the cost curve, idling a smelter, maintaining an idle potline and restart of idle capacity
carries significant costs. We expect production cuts in the event of prices correcting further or
staying at the current levels for extended period. We expect subdued prices till 1QCY12E post
which normality may return.
Zinc—surplus to hurt
Zinc has been in surplus for the past four years and will remain so for the next two years. This has
led to increasing inventory levels, which at nine weeks of consumption are close to an all-time
high. Admittedly, much of the inventories are locked up in financing deals, reflected in high
inventory build-up in New Orleans warehouses. Zinc has moved into backwardation recently; more
metal may return to the market if the backwardation widens or persists.
On the positive side, zinc is trading below the costs of marginal Chinese producers; commodity
may get cost support. From a medium-term view, zinc may get support from decline in production
and closure of large mines in 2013/14E. We take a cautious view on the near-term prices and
lower FY2012-13E zinc price forecast to US$2,050/2,025/tonne (US$2,075/2,125/tonne earlier).
Lower estimates; valuations are attractive. Retain constructive view on HZ and Sterlite
We lower earnings estimate for (1) Hindalco by 4/4.6% for FY2012/13E to Rs15.4/16 and TP by
6% to Rs150, (2) Sterlite by 2.3/9% for FY2012/13E to Rs13.2/Rs15.2 and TP by 6% to Rs155 and
(3) impact of lower zinc price for HZ is offset by building revised Re/US$ rate. Hence, HZ estimates
increase by 1.2/2.7%to Rs12.7/14.2 for FY2012/13E and TP by 3.6% to Rs145. Exhibit 1
summarizes key changes to our estimates. A US$100/tonne change in aluminum price impacts
Hindalco’s EBITDA by 4% and EPS by 7%. US$100/tonne change in zinc and lead prices impacts
Hindustan Zinc’s and Sterlite’s EBITDA by 6.8% and 6.6% and EPS by 6% and 7.5% respectively.
We retain our constructive view on non-ferrous names due (1) relatively low risk to commodity
prices, especially aluminium, and (2) distressed valuations—Sterlite’s valuation is justified by HZ
alone. Hindalco has relatively low sensitivity to change in aluminium prices with 61% of EBITDA
generated by the pure conversion business. In any case, markets are not ascribing any value to
CWIP of Mahan and Utkal. HZ’s high EBITDA sensitivity is offset by cash and cash equivalents
justifying 37% of the stock price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
Stay positive, underscore near-term pain. We fine-tune our commodity forecast for
FY2012-14E. Continued uncertainty on sovereign debt crisis in Eurozone, global
slowdown and weak financial sentiment may weigh on base metals prices. However,
the prices are supported by the fact that many commodities are trading well below
marginal cost of production. We cut aluminium price forecast to US$2,225-2,450/tonne
and zinc to US$2,025-2,300/tonne for FY2012-14E. We cut EPS estimates of nonferrous
names by 2-9% for FY2012-14E but maintain positive view on attractive
valuations. HZ is our top pick.
Aluminium—30% of smelting capacity losing money at current LME
We cut FY2012E and FY2013E aluminium price forecast by 2.2% and 2.1% to US$2,225 and
US$2,350, respectively. We retain our price forecast for FY2014E. Aluminium prices have corrected
by 26% in the past four months and since the sovereign debt crisis in Europe emerged. Current
LME prices of US$2,059/tonne are eating into the cost curve. CRU estimates that 30% of smelters
are losing money, of which 75% are Chinese producers. COP for Chinese producers may increase
further due to the proposed power tariff increase in China.
However, this will not result in immediate cut in production; in fact, many producers are still
looking at improving performance of assets and expanding existing capacity. Even as LME price is
eating into the cost curve, idling a smelter, maintaining an idle potline and restart of idle capacity
carries significant costs. We expect production cuts in the event of prices correcting further or
staying at the current levels for extended period. We expect subdued prices till 1QCY12E post
which normality may return.
Zinc—surplus to hurt
Zinc has been in surplus for the past four years and will remain so for the next two years. This has
led to increasing inventory levels, which at nine weeks of consumption are close to an all-time
high. Admittedly, much of the inventories are locked up in financing deals, reflected in high
inventory build-up in New Orleans warehouses. Zinc has moved into backwardation recently; more
metal may return to the market if the backwardation widens or persists.
On the positive side, zinc is trading below the costs of marginal Chinese producers; commodity
may get cost support. From a medium-term view, zinc may get support from decline in production
and closure of large mines in 2013/14E. We take a cautious view on the near-term prices and
lower FY2012-13E zinc price forecast to US$2,050/2,025/tonne (US$2,075/2,125/tonne earlier).
Lower estimates; valuations are attractive. Retain constructive view on HZ and Sterlite
We lower earnings estimate for (1) Hindalco by 4/4.6% for FY2012/13E to Rs15.4/16 and TP by
6% to Rs150, (2) Sterlite by 2.3/9% for FY2012/13E to Rs13.2/Rs15.2 and TP by 6% to Rs155 and
(3) impact of lower zinc price for HZ is offset by building revised Re/US$ rate. Hence, HZ estimates
increase by 1.2/2.7%to Rs12.7/14.2 for FY2012/13E and TP by 3.6% to Rs145. Exhibit 1
summarizes key changes to our estimates. A US$100/tonne change in aluminum price impacts
Hindalco’s EBITDA by 4% and EPS by 7%. US$100/tonne change in zinc and lead prices impacts
Hindustan Zinc’s and Sterlite’s EBITDA by 6.8% and 6.6% and EPS by 6% and 7.5% respectively.
We retain our constructive view on non-ferrous names due (1) relatively low risk to commodity
prices, especially aluminium, and (2) distressed valuations—Sterlite’s valuation is justified by HZ
alone. Hindalco has relatively low sensitivity to change in aluminium prices with 61% of EBITDA
generated by the pure conversion business. In any case, markets are not ascribing any value to
CWIP of Mahan and Utkal. HZ’s high EBITDA sensitivity is offset by cash and cash equivalents
justifying 37% of the stock price.
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