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

Grasim Industries - Target price revision - Standalone OPM disappoints led by higher costs: Centrum

Rating: Hold; Target Price: Rs2,785; CMP: Rs2,511; Upside: 10.9%



Standalone OPM disappoints led by higher costs



We maintain Hold rating on Grasim Industries with a revised price
target of Rs2,785 (Rs2,875 earlier) considering a) challenging
scenario for the VSF business which is likely to persist in the
near-term, b) lack of near-term triggers for the cement business  and
c) downward revision of 7.3%/6.6% in EPS estimates for FY14E/FY15E. We
believe that the challenges in the VSF business will persist due to
higher cotton inventory globally and favourable cotton procurement
policy in China, which has put pressure on VSF realization. In the
quarter, the profit of the company was below estimates due to
disappointment in the standalone business, where margins contracted
sharply.

$ Disappointment in standalone business leads to lower profits: Led by
higher operating costs, EBITDA from the standalone segment declined
9.7% YoY to Rs1.9bn (estimate: Rs2.7bn), despite 19.8% YoY growth in
revenues to Rs14.6bn (estimate: Rs14.3bn). Led by lower than estimated
EBITDA in the standalone segment, consolidated EBITDA at Rs9.8bn was
below our estimate of Rs10.9bn. Consolidated EBITDA declined 21.7% YoY
and OPM declined 4.8pp YoY. Profit declined 39.6% YoY during the
quarter.

$ VSF segment's margins contract due to higher raw material costs: OPM
of the VSF segment contracted 4.7pp YoY due to higher pulp prices and
rupee depreciation. Though there has been ~14% drop in VSF prices
globally, rupee depreciation has kept prices favourable in the
domestic market. Sales volume of VSF was up 23.5% YoY in the quarter.
EBITDA/kg of VSF declined to Rs17.4 against Rs23.9/kg in Q3FY13 and
Rs25.8/kg in Q2FY14.

$ Earnings estimates revised downwards: We have revised EBITDA
estimates downwards by 2.3%/1.5% for FY14E/FY15E considering higher
raw material costs (pulp price) in the standalone segment. Our
standalone EBITDA estimates are getting revised downwards by 5.2%/4.5%
for FY14E/FY15E. Change in EBITDA estimates leads to 7.3%/6.6%
downward revision in EPS estimates for FY14E/FY15E.

$ Valuation and key risks: The stock trades at 9.5x FY15E EPS, 4.4x
EV/EBITDA and 1.1x P/BV. We have valued the standalone entity at 5x
Dec-FY15E EV/EBITDA and assign 40% discount for its holding in
UltraTech and other companies. We maintain Hold rating on the stock
with a potential upside of 10.9%. Upside risk to our thesis could be
a) firm VSF prices going ahead and b) better-than-estimated cement
price. Key downside risks could be a) fall in cotton price globally
which could impact VSF price, b) lower-than-expected sales volume of
its cement subsidiary.



Thanks & Regards

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