Volumes to drive uptick in earnings for the quarter
We expect smart improvement in operational performance YoY for our
metals & mining universe during Q1FY15 on account of i) higher volumes
led by expansions, improved logistics and better marketing, ii) higher
realizations for miners and non-ferrous producers but flattish for
ferrous and iii) cost benefits due to lower raw material prices. We
expect positive earnings surprise from NMDC, Hindalco & GMDC while
negative earnings surprise from Sesa Sterlite, HZL and Coal India.
Volatility in stock prices remains high and we continue to maintain
Sell on producers due to expensive valuations. We prefer miners and
refractory producers as our long term bets.
$ Ferrous & Mining – higher volumes and lower RM costs to drive
earnings: Volumes for ferrous names like Tata Steel, JSW and SAIL are
expected to be higher by 9-18% YoY led by expansions and strong
marketing effort. Volume growth for mining companies like Coal India
and GMDC is expected to remain subdued due to production issues but
robust for NMDC led by strong demand for fines and improvement in
logistics. Higher pellet volumes are expected to lift GPIL’s
earnings. Smart pick up in EBITDA seen YoY for ferrous names due to
lower coking coal costs.
$ Non Ferrous - LME shows sequential improvement: LME prices for Al
and Zn moved up by 5.3% and 2.3% QoQ which are expected to keep
earnings momentum up for non-ferrous stocks. We expect weak
performance from HZL due to lower MIC volumes while Hindalco is
expected to deliver higher earnings YoY led by strong aluminium and
copper volumes. Sesa Sterlite’s performance is expected to be lower
QoQ due to weak earnings from zinc, copper, power and iron ore
operations.
$ Budget expectations for metals sector: Removal of import duty (2.5%)
on iron ore, reduction in export duty on iron ore (from 30% to 20%),
higher export duty on bauxite (10% currently), higher export duty on
pellets (5% currently) and lower import duty on copper concentrate
(largely imported by domestic custom smelters). Other key expectations
which are unlikely to be met are higher import duty on steel (7.5%
currently) and aluminium (5% currently).
$ Recommendation – remain cautious, prefer miners and refractory
makers: We maintain cautious stance on the metals sector and believe
that the sharp rally was largely due to market preference for
cyclicals and high beta effect rather than change in fundamentals and
thus believe that broad-based metals sector rally will fizzle out
soon. We continue to be sellers of ferrous names like SAIL/Tata Steel
but maintain positive stance on miners like NMDC/GMDC. We continue to
prefer HZL over Sesa Sterlite and Hindalco in the non-ferrous space
due to its superior fundamentals. Among midcaps, we prefer GPIL and
IFGL.
Thanks & Regards
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��
We expect smart improvement in operational performance YoY for our
metals & mining universe during Q1FY15 on account of i) higher volumes
led by expansions, improved logistics and better marketing, ii) higher
realizations for miners and non-ferrous producers but flattish for
ferrous and iii) cost benefits due to lower raw material prices. We
expect positive earnings surprise from NMDC, Hindalco & GMDC while
negative earnings surprise from Sesa Sterlite, HZL and Coal India.
Volatility in stock prices remains high and we continue to maintain
Sell on producers due to expensive valuations. We prefer miners and
refractory producers as our long term bets.
$ Ferrous & Mining – higher volumes and lower RM costs to drive
earnings: Volumes for ferrous names like Tata Steel, JSW and SAIL are
expected to be higher by 9-18% YoY led by expansions and strong
marketing effort. Volume growth for mining companies like Coal India
and GMDC is expected to remain subdued due to production issues but
robust for NMDC led by strong demand for fines and improvement in
logistics. Higher pellet volumes are expected to lift GPIL’s
earnings. Smart pick up in EBITDA seen YoY for ferrous names due to
lower coking coal costs.
$ Non Ferrous - LME shows sequential improvement: LME prices for Al
and Zn moved up by 5.3% and 2.3% QoQ which are expected to keep
earnings momentum up for non-ferrous stocks. We expect weak
performance from HZL due to lower MIC volumes while Hindalco is
expected to deliver higher earnings YoY led by strong aluminium and
copper volumes. Sesa Sterlite’s performance is expected to be lower
QoQ due to weak earnings from zinc, copper, power and iron ore
operations.
$ Budget expectations for metals sector: Removal of import duty (2.5%)
on iron ore, reduction in export duty on iron ore (from 30% to 20%),
higher export duty on bauxite (10% currently), higher export duty on
pellets (5% currently) and lower import duty on copper concentrate
(largely imported by domestic custom smelters). Other key expectations
which are unlikely to be met are higher import duty on steel (7.5%
currently) and aluminium (5% currently).
$ Recommendation – remain cautious, prefer miners and refractory
makers: We maintain cautious stance on the metals sector and believe
that the sharp rally was largely due to market preference for
cyclicals and high beta effect rather than change in fundamentals and
thus believe that broad-based metals sector rally will fizzle out
soon. We continue to be sellers of ferrous names like SAIL/Tata Steel
but maintain positive stance on miners like NMDC/GMDC. We continue to
prefer HZL over Sesa Sterlite and Hindalco in the non-ferrous space
due to its superior fundamentals. Among midcaps, we prefer GPIL and
IFGL.
Thanks & Regards
--
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