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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
From ‘Cash’ To ‘Ash’
Riding piggyback on expanding global economies, which logically required more & more
consumption of metals, stocks belonging to the metals & mining sector rose like a phoenix
post 2004. However they collapsed like a pack of cards in the last one year (repeat of
CY2008 & 1HCY09), in line with the general market trend, as global economic order
turned turtle. Two main emerging economies of the world, India & China, belied expectations
of continuous growth, thus flattering to begin with only to deceive later. Demand for
metals has slumped. Companies, which went helter-skelter raising capacities through borrowed
funds, are left with bruised wounds and high interest outgoings. Metal & mining
stocks, especially the mid-cap ones, are trading at levels, described by many as dooms
day levels.
Is it the end of the story for mid-cap metal stocks? This report tries to find just this. We
believe dooms day is still millions of light years away. Metals are required & will be required.
But which companies to invest in? While we leave large steel companies to be
analyzed on some other day, in this report we have picked up mid-cap metal companies
for analysis. Herein we try to separate good ones from not so good ones based on three
parameters (1) level of raw material integration, (2) phase of capex cycle and (3) strength
of balance sheet.
None of the Companies Under Review Have 100% Raw Material Integration:
All the companies under review have been allotted captive iron ore and coal mines. However,
very few have operational mines, as majority await various stages of regulatory
clearances. Unfortunately, none of the companies under review have both, captive iron
ore as well as coal mines. Given the lengthy regulatory procedures involved in new approvals,
we believe companies, which have operational mines, should be valued higher.
Companies with Captive Coal Mine are Better Placed than Captive Iron Ore:
India is a net exporter of iron ore (exports more than half of what it mines), whereas it is a
net importer of thermal coal. Our medium term outlook on iron ore is negative due to (1)
improved domestic supplies on account of hike in export duty to 30% (to curb illegal mining
by discouraging exports) and (2) declining international prices on account of increase
in global supplies. On the contrary, we are positive on the medium term outlook of thermal
coal as we believe delays in new mine supplies will continue to widen coal deficit in
India. With Coal India continuing to reduce coal supplies (priced at subsidized rates) to
steel producers, we believe companies with captive coal mine (operational) are better
placed than the ones with operating iron ore mines. Based on this we like Sarda Energy
and Prakash Industries, which have operational coal mines.
End of Capex Cycle Means Earnings Growth Momentum:
Companies with early and mid capex cycle generally report prolonged weak return ratios
due to piling capital work-in-progress and increasing debt/interest burden. Considering
this, coupled with current weak market conditions, we believe earnings and balance sheet
of these companies will be under stress over the next few years. Hence, we like companies
which have completed or are on the verge of completing their capex program. These
companies are not only expected to report bottom line growth but also expected to see
improvement in their balance sheets. Hence we like MSP Steel and Sarda Energy.
Balance Sheet Strength is Important in Weak Markets:
We believe metals as a sector, ferrous as well as non-ferrous, continues to witness earnings
risk due to uncertain demand outlook. Given weak market conditions we believe
companies with stronger balance sheet will be better placed to face the current downtrend
without impacting their credit risk. In terms of balance sheet strength, we like Tata Sponge
and Prakash Industries.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
From ‘Cash’ To ‘Ash’
Riding piggyback on expanding global economies, which logically required more & more
consumption of metals, stocks belonging to the metals & mining sector rose like a phoenix
post 2004. However they collapsed like a pack of cards in the last one year (repeat of
CY2008 & 1HCY09), in line with the general market trend, as global economic order
turned turtle. Two main emerging economies of the world, India & China, belied expectations
of continuous growth, thus flattering to begin with only to deceive later. Demand for
metals has slumped. Companies, which went helter-skelter raising capacities through borrowed
funds, are left with bruised wounds and high interest outgoings. Metal & mining
stocks, especially the mid-cap ones, are trading at levels, described by many as dooms
day levels.
Is it the end of the story for mid-cap metal stocks? This report tries to find just this. We
believe dooms day is still millions of light years away. Metals are required & will be required.
But which companies to invest in? While we leave large steel companies to be
analyzed on some other day, in this report we have picked up mid-cap metal companies
for analysis. Herein we try to separate good ones from not so good ones based on three
parameters (1) level of raw material integration, (2) phase of capex cycle and (3) strength
of balance sheet.
None of the Companies Under Review Have 100% Raw Material Integration:
All the companies under review have been allotted captive iron ore and coal mines. However,
very few have operational mines, as majority await various stages of regulatory
clearances. Unfortunately, none of the companies under review have both, captive iron
ore as well as coal mines. Given the lengthy regulatory procedures involved in new approvals,
we believe companies, which have operational mines, should be valued higher.
Companies with Captive Coal Mine are Better Placed than Captive Iron Ore:
India is a net exporter of iron ore (exports more than half of what it mines), whereas it is a
net importer of thermal coal. Our medium term outlook on iron ore is negative due to (1)
improved domestic supplies on account of hike in export duty to 30% (to curb illegal mining
by discouraging exports) and (2) declining international prices on account of increase
in global supplies. On the contrary, we are positive on the medium term outlook of thermal
coal as we believe delays in new mine supplies will continue to widen coal deficit in
India. With Coal India continuing to reduce coal supplies (priced at subsidized rates) to
steel producers, we believe companies with captive coal mine (operational) are better
placed than the ones with operating iron ore mines. Based on this we like Sarda Energy
and Prakash Industries, which have operational coal mines.
End of Capex Cycle Means Earnings Growth Momentum:
Companies with early and mid capex cycle generally report prolonged weak return ratios
due to piling capital work-in-progress and increasing debt/interest burden. Considering
this, coupled with current weak market conditions, we believe earnings and balance sheet
of these companies will be under stress over the next few years. Hence, we like companies
which have completed or are on the verge of completing their capex program. These
companies are not only expected to report bottom line growth but also expected to see
improvement in their balance sheets. Hence we like MSP Steel and Sarda Energy.
Balance Sheet Strength is Important in Weak Markets:
We believe metals as a sector, ferrous as well as non-ferrous, continues to witness earnings
risk due to uncertain demand outlook. Given weak market conditions we believe
companies with stronger balance sheet will be better placed to face the current downtrend
without impacting their credit risk. In terms of balance sheet strength, we like Tata Sponge
and Prakash Industries.
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