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India Equity Research Reports, IPO and Stock News
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Metals & Mining
India
Pain may last longer. We cut EBITDA estimates for steel names by 2-26% and target
price by 4-17%. EBITDA cut is on the back of 2-6% cut in HRC steel price and iron ore
price assumption, which is partly offset by revised Re/US$ assumption. Our revised
estimates capture impact of continued slowdown in 1HFY12 followed by moderate
recovery in 2H. While the collapse in steel prices raises concerns of a repeat of 2008,
low inventory levels and production discipline may prevent an encore. We maintain our
BUY rating on Tata Steel and negative view on rest of the names.
Slowdown to hurt though low inventory and production discipline may prevent steel price collapse
We moderate our steel price assumption to US$670/ US$635/ US$640 for CIS export price (CIF) for
FY2012/13/14E, respectively. We also reduce our iron ore price assumption (Indian Iron ore fine
63.5% delivered to China). Slowdown in most of the markets except North America has led to
significant correction in steel prices over the past three months. Steel prices have corrected by
14.6% in the past three months with distressed offers from CIS countries at US$578/ tonne (HRC
on FOB). However, two factors may help prevent a total collapse in steel prices—(1) production
discipline seems to be returning. Global steel production growth is down to a marginal 0.8% in
November 2011 with a decline in production in China and steel capacity utilization is at a two-year
low of 73.4%. Interesting to note that annualized steel production in China in the first 10 days of
December is at a run rate of 615 mn tonnes, down from 708 mn tonnes in October 2011, and
(2) inventory across key markets is running at extremely low levels. We expect near-term pressure
in steel prices before recovery in the 2H of 2012.
Some improvement in domestic steel demand, though may be short lived
November 2011 apparent steel consumption in India showed a surprising bounce-back to 11.7%
growth though the overall numbers for financial year to date is still a pretty muted 3.9%.
November data showed a surprising jump in steel imports of 215% yoy to 880 kt. Leaving aside
strong number for November, we expect steel consumption growth to remain muted as the
investment cycle has been impacted by high borrowing cost and policy inaction. Even if policy
decisions are taken, it will take at least four quarters for this to translate into a material pick-up in
economic activity. Growth in steel demand will be at best a 2HFY13E story. We forecast steel
demand growth of 2.7% and 6.7% in FY2012E and FY2013E versus historical trend of 10-14%.
Rupee depreciation (our economist has revised FY2012/13E Re/US$ rate to Rs48.7/52.5 from
Rs47.3/49.8 earlier) does not lead to a meaningful change in our domestic HRC price assumption
even as we cut global price assumption by 2-6%.
Cut estimates and target price, REDUCE Sesa, JSW Steel and JSP and BUY Tata Steel
Steel names with the exception of JSPL now trade at 0.6-0.9X FY2013E book. Valuations are
getting attractive though we would wait for either uptick in steel prices or stocks reaching distress
levels before turning constructive. We cut EBITDA estimates by 2-26% for FY2012-14E and target
price by 4-17%. Tata Steel remains our only BUY rated steel name though we cut our fair value to
Rs490. We find Tata Steel attractively valued, especially with strong catalysts in the form of
commissioning of brownfield expansion and returns from overseas raw material investments. In
our view, near-term overhang of Corus performance is known and discounted. JSW Steel is
saddled with high leverage and structural impact on profitability; TP cut to Rs545 with a REDUCE
rating. JSPL has corrected though not attractive enough for a rating change; REDUCE with TP of
Rs540. Sesa is attractive but has overhang from potential fallout of investigation into illegal mining
in Goa; TP cut to Rs190 with REDUCE rating retained.
Sesa Goa value emerging but also risks of business model continuity
Sesa Goa stock price declined by 24% in the past three months and is currently trading at
seemingly attractive price levels. However, given the ongoing ban on mining in Karnataka (6
mtpa Narrain mine) and investigation into illegal mining in Goa the outcome of which is
uncertain, its overall iron ore mining operations are at risk. Downside risks to our volume
assumptions are high. Given this continued uncertainty, we maintain our REDUCE rating
with a revised TP of Rs190/share. Our EPS estimates and fair value would reduce by 4.2%
and 6.3% respectively if mining tax is implemented beginning FY2013E.
We value the core business at Rs93/share based on long-term iron price of US$77 dmt (longterm
benchmark price, fob basis). We value the stake in Cairn India at Rs99/share after
assigning a 30% holding discount. Sesa Goa together with its wholly owned subsidiary
picked up a further 1.5% stake in Cairn India through a block deal, taking its total stake in
the company to 20% of the outstanding share capital. Hence we consolidate proportionate
earnings in our estimates beginning FY2012E as opposed to modeling dividend income from
Cairn earlier. Our FY2012E and FY2013E EPS estimates change on account of this
consolidation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
Pain may last longer. We cut EBITDA estimates for steel names by 2-26% and target
price by 4-17%. EBITDA cut is on the back of 2-6% cut in HRC steel price and iron ore
price assumption, which is partly offset by revised Re/US$ assumption. Our revised
estimates capture impact of continued slowdown in 1HFY12 followed by moderate
recovery in 2H. While the collapse in steel prices raises concerns of a repeat of 2008,
low inventory levels and production discipline may prevent an encore. We maintain our
BUY rating on Tata Steel and negative view on rest of the names.
Slowdown to hurt though low inventory and production discipline may prevent steel price collapse
We moderate our steel price assumption to US$670/ US$635/ US$640 for CIS export price (CIF) for
FY2012/13/14E, respectively. We also reduce our iron ore price assumption (Indian Iron ore fine
63.5% delivered to China). Slowdown in most of the markets except North America has led to
significant correction in steel prices over the past three months. Steel prices have corrected by
14.6% in the past three months with distressed offers from CIS countries at US$578/ tonne (HRC
on FOB). However, two factors may help prevent a total collapse in steel prices—(1) production
discipline seems to be returning. Global steel production growth is down to a marginal 0.8% in
November 2011 with a decline in production in China and steel capacity utilization is at a two-year
low of 73.4%. Interesting to note that annualized steel production in China in the first 10 days of
December is at a run rate of 615 mn tonnes, down from 708 mn tonnes in October 2011, and
(2) inventory across key markets is running at extremely low levels. We expect near-term pressure
in steel prices before recovery in the 2H of 2012.
Some improvement in domestic steel demand, though may be short lived
November 2011 apparent steel consumption in India showed a surprising bounce-back to 11.7%
growth though the overall numbers for financial year to date is still a pretty muted 3.9%.
November data showed a surprising jump in steel imports of 215% yoy to 880 kt. Leaving aside
strong number for November, we expect steel consumption growth to remain muted as the
investment cycle has been impacted by high borrowing cost and policy inaction. Even if policy
decisions are taken, it will take at least four quarters for this to translate into a material pick-up in
economic activity. Growth in steel demand will be at best a 2HFY13E story. We forecast steel
demand growth of 2.7% and 6.7% in FY2012E and FY2013E versus historical trend of 10-14%.
Rupee depreciation (our economist has revised FY2012/13E Re/US$ rate to Rs48.7/52.5 from
Rs47.3/49.8 earlier) does not lead to a meaningful change in our domestic HRC price assumption
even as we cut global price assumption by 2-6%.
Cut estimates and target price, REDUCE Sesa, JSW Steel and JSP and BUY Tata Steel
Steel names with the exception of JSPL now trade at 0.6-0.9X FY2013E book. Valuations are
getting attractive though we would wait for either uptick in steel prices or stocks reaching distress
levels before turning constructive. We cut EBITDA estimates by 2-26% for FY2012-14E and target
price by 4-17%. Tata Steel remains our only BUY rated steel name though we cut our fair value to
Rs490. We find Tata Steel attractively valued, especially with strong catalysts in the form of
commissioning of brownfield expansion and returns from overseas raw material investments. In
our view, near-term overhang of Corus performance is known and discounted. JSW Steel is
saddled with high leverage and structural impact on profitability; TP cut to Rs545 with a REDUCE
rating. JSPL has corrected though not attractive enough for a rating change; REDUCE with TP of
Rs540. Sesa is attractive but has overhang from potential fallout of investigation into illegal mining
in Goa; TP cut to Rs190 with REDUCE rating retained.
Sesa Goa value emerging but also risks of business model continuity
Sesa Goa stock price declined by 24% in the past three months and is currently trading at
seemingly attractive price levels. However, given the ongoing ban on mining in Karnataka (6
mtpa Narrain mine) and investigation into illegal mining in Goa the outcome of which is
uncertain, its overall iron ore mining operations are at risk. Downside risks to our volume
assumptions are high. Given this continued uncertainty, we maintain our REDUCE rating
with a revised TP of Rs190/share. Our EPS estimates and fair value would reduce by 4.2%
and 6.3% respectively if mining tax is implemented beginning FY2013E.
We value the core business at Rs93/share based on long-term iron price of US$77 dmt (longterm
benchmark price, fob basis). We value the stake in Cairn India at Rs99/share after
assigning a 30% holding discount. Sesa Goa together with its wholly owned subsidiary
picked up a further 1.5% stake in Cairn India through a block deal, taking its total stake in
the company to 20% of the outstanding share capital. Hence we consolidate proportionate
earnings in our estimates beginning FY2012E as opposed to modeling dividend income from
Cairn earlier. Our FY2012E and FY2013E EPS estimates change on account of this
consolidation.
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