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Metals & Mining
India
3QFY12 preview—Rupee to the rescue. We expect qoq and yoy decline in earnings
for the Indian metal companies, except JSPL, driven primarily by decline in metal prices
(11-19% qoq decline in US$ terms) and mark-to-market losses on unhedged Fx loans.
Decline in earnings could have been higher but for sharp qoq depreciation of 8.4% of
Rupee against US$, which helped protect realization. Select metal stocks are now
trading at attractive valuations and present a good buying opportunity. Tata Steel and
Hindustan Zinc are our top picks in the sector.
Global commodity prices decline but Rupee depreciation to the rescue
Non-ferrous commodity prices have declined by up to 12-19% qoq while HRC prices (CIS FOB)
have declined by 12.5% qoq. However, this has translated into minor changes in Rupee realization
courtesy 8.4% qoq currency depreciation. Average aluminium realization was Rs106,700/tonne
(down 2.8% qoq), zinc Rs97,280/tonne (down 4.3% qoq) and HRC Rs35,800/tonne (down 1.6%
qoq). Companies with lower reliance on raw material imports stand to benefit; Hindustan Zinc and
Hindalco stand out in this respect.
Mixed performance from steel names; Tata Steel and JSW to be impacted, JSPL to shine
We expect weak performance from steel names such as Tata Steel and JSW due to marginal
increase in raw material prices (courtesy Rupee depreciation) and marginal decline in realization.
Performance will likely be further impacted by forex losses for unhedged overseas borrowings. We
expect EBITDA/tonne of Rs4,967 (-27.5% qoq, -17.9% yoy) from JSW Steel and EBITDA of Rs10.3
bn (-25.9% qoq). This combined with forex loss of Rs2.1 bn will result in the company reporting
net loss of Rs0.5 bn in 3QFY12E as against net income of Rs2.9 bn in 3QFY11.
Tata Steel’s domestic performance may be impacted by lower realization, especially from the Ferro
alloy segment and will reflect in 9.9% qoq and 12% yoy decline in EBITDA/tonne to Rs14,751. In
addition, EBITDA loss of US$64 mn (EBITDA loss of US$20/tonne) at Corus and US$30 mn loss
from subsidiaries will likely lead to 29.4% qoq and 43.3% yoy EBITDA decline to Rs19.4 bn.
Exception to the weak steel performance is JSPL, which in our view will likely benefit from strong
pellet prices, stable long product prices and increase in merchant power realization. JSPL will be
the only steel name to report growth in EBITDA and net income.
Softening of commodity prices and elevated cost structure to impact profitability of non-ferrous
We expect the performance of non-ferrous companies to be impacted by decline in commodity
prices. LME zinc/lead and aluminium prices have each declined by around 12-19% qoq, offset to
some extent by Rupee depreciation. Hindalco’s operating profit will likely decline due to lower
commodity prices and input cost inflation. Sterlite's earnings will also decline sequentially on
weakness in zinc and aluminium prices and non-availability of coal impacting IPP PLF.
Select stocks are attractive; BUY Tata Steel, HZ and Sterlite
Metal stocks declined by 40-55% in 2011 and are trading between 0.5-1X book and 5-7X EBITDA.
With low risk to select commodities such as aluminium and zinc from here and attractive
valuations, we believe in recommending buying into select names. Sterlite Industries trades at less
than the value of its stake in Hindustan Zinc and at 0.6X FY2013E book is attractive, in our view.
Tata Steel at 0.8X book is our preferred pick. We would also recommend Hindustan Zinc and
Hindalco at the current levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
3QFY12 preview—Rupee to the rescue. We expect qoq and yoy decline in earnings
for the Indian metal companies, except JSPL, driven primarily by decline in metal prices
(11-19% qoq decline in US$ terms) and mark-to-market losses on unhedged Fx loans.
Decline in earnings could have been higher but for sharp qoq depreciation of 8.4% of
Rupee against US$, which helped protect realization. Select metal stocks are now
trading at attractive valuations and present a good buying opportunity. Tata Steel and
Hindustan Zinc are our top picks in the sector.
Global commodity prices decline but Rupee depreciation to the rescue
Non-ferrous commodity prices have declined by up to 12-19% qoq while HRC prices (CIS FOB)
have declined by 12.5% qoq. However, this has translated into minor changes in Rupee realization
courtesy 8.4% qoq currency depreciation. Average aluminium realization was Rs106,700/tonne
(down 2.8% qoq), zinc Rs97,280/tonne (down 4.3% qoq) and HRC Rs35,800/tonne (down 1.6%
qoq). Companies with lower reliance on raw material imports stand to benefit; Hindustan Zinc and
Hindalco stand out in this respect.
Mixed performance from steel names; Tata Steel and JSW to be impacted, JSPL to shine
We expect weak performance from steel names such as Tata Steel and JSW due to marginal
increase in raw material prices (courtesy Rupee depreciation) and marginal decline in realization.
Performance will likely be further impacted by forex losses for unhedged overseas borrowings. We
expect EBITDA/tonne of Rs4,967 (-27.5% qoq, -17.9% yoy) from JSW Steel and EBITDA of Rs10.3
bn (-25.9% qoq). This combined with forex loss of Rs2.1 bn will result in the company reporting
net loss of Rs0.5 bn in 3QFY12E as against net income of Rs2.9 bn in 3QFY11.
Tata Steel’s domestic performance may be impacted by lower realization, especially from the Ferro
alloy segment and will reflect in 9.9% qoq and 12% yoy decline in EBITDA/tonne to Rs14,751. In
addition, EBITDA loss of US$64 mn (EBITDA loss of US$20/tonne) at Corus and US$30 mn loss
from subsidiaries will likely lead to 29.4% qoq and 43.3% yoy EBITDA decline to Rs19.4 bn.
Exception to the weak steel performance is JSPL, which in our view will likely benefit from strong
pellet prices, stable long product prices and increase in merchant power realization. JSPL will be
the only steel name to report growth in EBITDA and net income.
Softening of commodity prices and elevated cost structure to impact profitability of non-ferrous
We expect the performance of non-ferrous companies to be impacted by decline in commodity
prices. LME zinc/lead and aluminium prices have each declined by around 12-19% qoq, offset to
some extent by Rupee depreciation. Hindalco’s operating profit will likely decline due to lower
commodity prices and input cost inflation. Sterlite's earnings will also decline sequentially on
weakness in zinc and aluminium prices and non-availability of coal impacting IPP PLF.
Select stocks are attractive; BUY Tata Steel, HZ and Sterlite
Metal stocks declined by 40-55% in 2011 and are trading between 0.5-1X book and 5-7X EBITDA.
With low risk to select commodities such as aluminium and zinc from here and attractive
valuations, we believe in recommending buying into select names. Sterlite Industries trades at less
than the value of its stake in Hindustan Zinc and at 0.6X FY2013E book is attractive, in our view.
Tata Steel at 0.8X book is our preferred pick. We would also recommend Hindustan Zinc and
Hindalco at the current levels.
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