J.P. Morgan - India Metals & Mining

India Metals & Mining More of an EM correction than a CHINA-led fall; We would be buyers of TATA and SSLT into correction

India Metal Equities - A China correction or an EM correction? Our sense is that it is the latter: YTD Indian MM equities are down 15-20% across steel and miners. This has come at the time of poor news flow out of China (in terms of PMI, shadow banking) and also broader EM redemptions and sell-offs. Fundamentally there has been no negative change on the ground, and results so far have been broadly okay. In our view, the correction seen so far YTD is similar to what we saw in the Jan-Aug 2013 correction, where the Indian MM equities were most hit. In our view, the current round of correction is being driven more by the EM sell-off and less by China worries. This can be seen by the divergent performances of levered MM equities globally. Fortescue (FMG) has actually OUTPERFORMED both TATA and JSW YTD, similar to the correction seen in Jan-Aug 2013. Even within steel, Arcelor has so far outperformed TATA YTD.

Why is the distinction important?: In our view, if the stock price declines for the Indian MM equities are far larger than global peers, even as the broad pricing environment remains the same, then corrections should be bought into. This seems to be the case. For the Indian MM universe, the INR has weakened which is also positive. Our earnings estimates are predicated on INRUSD of 60 for FY15 vs ~63 currently.

Steel prices improve, spreads increase, and results in line to positive beat: Domestic steel prices have moved up 1-2% in February, and companies such as SAIL have reported ~10% y/y sales volume growth in Jan 2014. Steel spreads have moved up sharply as steel prices have been steady even as raw material prices have fallen, and in our view, while steel prices WOULD fall from current levels, over the coming weeks, the declines are likely to be lower than RM cost decline. The European pricing and demand environment remains relatively strong, and in our view there are upside risks to consensus earnings estimates.

Our top picks remain TATA, SSLT and JSW. We would be buyers into the correction, as we see :
a) potential upgrades to consensus estimates; b) an improving FCF profile and c) an improved regulatory environment.

Link to our yesterday’s Lodestone: The Lodestone: Steel spreads pick up as steel prices not falling in sync with RM costs; More clarity on Goa auction- Exports allowed

Figure 1: Global Steel stock performance YTD14 return 

Source: Bloomberg

Figure 2: Global Steel stock performance Jan’13-Aug’13 return 

Source: Bloomberg

Figure 3: Global Steel stock performance CY13 return 

Source: Bloomberg

Figure 4: Global Miners stock performance YTD14 return 

Source: Bloomberg

Figure 5: Global Miners stock performance Jan’13-Aug’13 return 

Source: Bloomberg

Figure 6: Global Miners stock performance CY13 return 

Source: Bloomberg

Table 1: JPMe vs. Consensus estimates for 3QFY14 for HNDL, NMDC and COAL

HNDL - Standalone	Reports on 13th Feb
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	6,793	6,059
PAT	4,103	3,691
NMDC	Reports on 10th Feb
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	17,972	18,134
PAT	15,706	15,457
COAL	Reports on 12th Feb
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	45,780	38,467
PAT	39,919	38,336

Source: J.P. Morgan, Bloomberg

Table 2: JPMe vs. Consensus estimates for 3QFY14 for TATA and SAIL

TATA - Standalone	Reports on 11th Feb
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	30,101	31,884
PAT	14,928	15,582
TATA - Consolidated	Reports on 11th Feb
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	36,702	37,529
PAT	4,629	6,973
SAIL	Reports on 12th Feb(E)
In Mn	Dec-13 JPMe	Dec-13 BBG
EBITDA	12,105	11,401
PAT	5,508	5,102

Source: J.P. Morgan, Bloomberg

Metals & Mining

��

-->