Disappointment in store after sharp recent run-up
We see the strong recent (1-3mth) run up in metals stocks halting
post Q3 earnings release and expect muted operational performance from
our universe during Q3FY14 on account of i) flat sequential volumes
due to poor domestic demand, ii) lower than expected realization
improvements despite price hikes and iii) limited incremental cost
benefits. With stocks running up sharply since last earnings leading
to estimate upgrades by analysts, we see the possibility of a reversal
in the build up to and post Q3 earnings which are expected to
disappoint.
$ Positive and negative earnings surprises: We expect sharp YoY
earnings improvements from JSW Steel, NMDC, and HZL driven by strong
volumes and better realizations. Among midcaps, we see strong
performance from GPIL driven by higher merchant pellet sales and
expect higher realizations in explosives (particularly from cartridge
segment) to drive earnings for Solar Inds. We see muted performance
from Tata Steel (pressure on volumes in domestic and overseas
operations), Coal India (below target volume performance) and GMDC
(dismal volumes due to delay in mine restarts).
$ Ferrous & Mining - marginally better realizations but volumes muted:
Volume pick up remained lacklustre for ferrous producers as well as
mining companies due to weak domestic demand, extended monsoons and
logistics related challenges. Volumes for Tata Steel and Coal India
are expected to disappoint while remaining robust for NMDC, SAIL and
JSW. Higher pellet volumes are expected to drive GPIL’s earnings.
Realizations are expected to be up marginally on a QoQ basis as price
hikes had limited impact due to weak demand.
$ Non Ferrous - weak rupee continues to cushion subdued LME prices:
Subdued LME prices (flat QoQ but down 3-10% YoY) continue to get the
cushion of weak rupee and strong premiums providing realizations
relief for non-ferrous producers. We expect better performance from
Hindalco and HZL (on both YoY and QoQ basis) due to higher volumes.
Sesa Sterlite’s performance will be largely driven by HZL & Cairn as
earnings from iron ore, power and international zinc businesses
remained weak during the quarter.
$ Recommendation - Maintain positive stance on the mining space: We
believe that the current quarter results (particularly for ferrous
names) would disappoint on volumes and margin front and fail to
justify the sharp recent run up in the stocks which have taken it
beyond fair value in our view. Mining names on the other hand are
expected to see better realization traction and would likely provide
better clarity on volumes going ahead. We maintain positive stance on
mining stocks and remain sellers of all ferrous names under our
coverage. We continue to prefer HZL over Sesa Sterlite and Hindalco in
the non-ferrous space.
Thanks & Regards
--
��
We see the strong recent (1-3mth) run up in metals stocks halting
post Q3 earnings release and expect muted operational performance from
our universe during Q3FY14 on account of i) flat sequential volumes
due to poor domestic demand, ii) lower than expected realization
improvements despite price hikes and iii) limited incremental cost
benefits. With stocks running up sharply since last earnings leading
to estimate upgrades by analysts, we see the possibility of a reversal
in the build up to and post Q3 earnings which are expected to
disappoint.
$ Positive and negative earnings surprises: We expect sharp YoY
earnings improvements from JSW Steel, NMDC, and HZL driven by strong
volumes and better realizations. Among midcaps, we see strong
performance from GPIL driven by higher merchant pellet sales and
expect higher realizations in explosives (particularly from cartridge
segment) to drive earnings for Solar Inds. We see muted performance
from Tata Steel (pressure on volumes in domestic and overseas
operations), Coal India (below target volume performance) and GMDC
(dismal volumes due to delay in mine restarts).
$ Ferrous & Mining - marginally better realizations but volumes muted:
Volume pick up remained lacklustre for ferrous producers as well as
mining companies due to weak domestic demand, extended monsoons and
logistics related challenges. Volumes for Tata Steel and Coal India
are expected to disappoint while remaining robust for NMDC, SAIL and
JSW. Higher pellet volumes are expected to drive GPIL’s earnings.
Realizations are expected to be up marginally on a QoQ basis as price
hikes had limited impact due to weak demand.
$ Non Ferrous - weak rupee continues to cushion subdued LME prices:
Subdued LME prices (flat QoQ but down 3-10% YoY) continue to get the
cushion of weak rupee and strong premiums providing realizations
relief for non-ferrous producers. We expect better performance from
Hindalco and HZL (on both YoY and QoQ basis) due to higher volumes.
Sesa Sterlite’s performance will be largely driven by HZL & Cairn as
earnings from iron ore, power and international zinc businesses
remained weak during the quarter.
$ Recommendation - Maintain positive stance on the mining space: We
believe that the current quarter results (particularly for ferrous
names) would disappoint on volumes and margin front and fail to
justify the sharp recent run up in the stocks which have taken it
beyond fair value in our view. Mining names on the other hand are
expected to see better realization traction and would likely provide
better clarity on volumes going ahead. We maintain positive stance on
mining stocks and remain sellers of all ferrous names under our
coverage. We continue to prefer HZL over Sesa Sterlite and Hindalco in
the non-ferrous space.
Thanks & Regards
--
No comments:
Post a Comment