Coal Auction - Round 1: Price War; Event Update :: Edelweiss

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Sector Preview Q3FY15 - Metal :: HDFC Securities

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Metals & Mining: MMDR ordinance - may bring cheer to miners :: Kotak Sec,report

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MMDR ordinance—may bring cheer to miners. The MMDR ordinance provides
deemed extension of existing mine leases to the later of (1) March 2030 for
captive/March 2020 for merchant or (2) end of 50 years from the date of the initial
grant of lease or (3) the actual expiry of the mining lease. The existing mines will be put
on auction after this period. The transition period provided by the bill may bring cheer
to miners and end uncertainty about mining operations (except in Odisha). Payment to
the District Mining Fund and National Mineral Exploration Trust has been set at 33%
and 2% of royalty, respectively. Non-integrated mills like JSW Steel can gain from
expedited mine auctions.

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Metals & Mining: 3QFY15E preview: weak for steel :: Kotak Securities

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3QFY15E preview: weak for steel. Domestic steel companies will report a 3-27% qoq
decline in EBITDA due to a 3-4% decline in steel prices, high iron ore costs due to mine
shutdowns and muted sales; Tata Steel will be impacted most. Non-ferrous names will
benefit from higher volumes from aluminum capacity ramp-ups and increased zinc
mined metal production. Sesa Sterlite will still report a sequential EBITDA decline due to
Cairn. We maintain our cautious outlook on the sector and prefer companies with low
raw material benefit/regulatory risks. We prefer Sesa Sterlite and JSW Steel.

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Metals & Mining ƒ Steel demand continues to remain subdued, prices remained flattishƒ :Q3FY15 Result Preview : ICICI Securities, report

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The government approved amendments in mining and minerals ACT :: IndiaNivesh, link

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Metals & Mining 3QFY15E Results Preview :: HDFC Securities

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SECTOR UPDATE: COAL BLOCK AUCTION :: Kotak Sec

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Metals and Mining - Final Guidelines for Coal Auctions Issued :: Edelweiss, link

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Stock Ideas for December 2014:: Edelweiss

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Metals and Minings - New Coal Ordinance: A Partial Reform :: Edelweiss, PDF link

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Metals and Mining - Coal Block Case: Mine Owners Woes Continue; Sector Update :: Edelweiss PDF link

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The Supreme Court (SC) today passed a key judgement cancelling all 218 captive coal blocks (barring 4 belonging to SAIL, NTPC and Reliance Power). It also imposed penalty of INR295/t on producing coal blocks since start of production, transferring their operations to Coal India (CIL) within 6 months. The judgement is silent on auction and it will be up to the government to decide on the same. We see a risk that all the deallocated mines may not be auctioned, CIL may retain certain producing blocks and supply only part of current mine-owner’s production. We perceive highest impact on JSPL (~12mtpa production) with penalty of INR30bn (INR33/share), FY16E EBITDA cut of ~8% and target price reducing to INR209 (earlier INR304). Impact on Hindalco will be marginal- penalty of INR5bn (INR2.5/share), FY16E EBITDA cut of ~2% and target price reducing to INR223 (earlier INR240). With correction in JSPL stock, we retain ‘HOLD’ on the company; maintain ‘BUY’ on Hindalco.

SC cancels all coal blocks; CIL to takeover within 6 months

In its judgement today, the SC ordered: (i) all 218 captive coal blocks to be cancelled, barring 4 blocks of NTPC, SAIL and Reliance Power; (ii) 40 producing coal blocks to pay a penalty of INR295/t since start of production; and (iii) all producing coal blocks to be turned over to CIL within next 6 months. The judgement is silent on possible auction of the coal blocks and the onus is on the government to decide future course of action.

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Kotak reports from 18 Sep :: Kotak Sec, PDF report link

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Company
Karur Vysya Bank: Steady improvement
` We maintain BUY as the bank is addressing critical headwinds
` Tier-1 ratio improves; leverage ratio comfortable but high versus peers
` Greater focus on costs, revenue growth offer comfort


Sector
Metals & Mining: Complexities of the coal conundrum
` Captive blocks - expected step-up improvement may be delayed
` Few fallback options - little headroom for CIL, imports technology, cost
prohibitive
` Jindal Steel and Power most impacted, Coal India the only potential
beneficiary


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Metals & Mining Sector Update :: ICICI Sec

Royalty rates revised upwards…
According to media reports, the government has given its approval to
increase royalty rates on minerals. Almost all minerals, including iron ore,
bauxite, zinc, lead, etc would be impacted by new royalty rates. However,
it excludes coal, lignite and sand for stowing whose royalty rates have
been kept unchanged. Royalty rates are charged on an ad-valorem basis.
A few media reports indicate that approval has been based on the
recommendation of a study group. The study group had recommended a
hike in royalty rates of (a) iron ore: 15% from 10% earlier, (b) zinc (metal
in concentrate): 10% from 8.4% earlier, (c) lead (metal in concentrate):
12.7% from 14.5% earlier and (d) bauxite: 0.6% from 0.5% earlier. The
final rates are yet to be publicly notified.

Our view
ƒ The increase in royalty rates will boost the revenues of mineral
rich states, including Odisha, Goa, Karnataka and Chhattisgarh
among others
ƒ The increase in royalty rates will lead to an increase in cost of
production of companies. However, we believe metal companies
will largely be able to pass on the recent hike in royalty rate.
Hence, we have maintained our rating and estimates

Metals & Mining - Sector Update - Volumes to drive uptick in earnings for the quarter:: Centrum

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

--

J.P. Morgan - India Metal & Mining

Indian MM equities have been the best performing sector post elections, up ~22% v/s the broader MSCI India which was up 6%. Large cap stocks in the sector have rallied ~30-50%. While the election results are cited as the key catalyst for the sharp move, in our view, massively under-weight investor positioning, especially among Foreign Investors (please see chart below from our strategist team on weights) has driven the sharp rerating as positioning shifts from one extreme pre elections, to another extreme post elections. How much the actual holding has changed will only be known post the June quarter, when the company wise holding data is available. Our conversations with investors highlight a rush to buy these names, irrespective of valuations, fundamentals and earnings momentum, with some investors asking us to look at these names in a FY17/18E basis.

 

Given the sharp run up in the Indian MM universe, and U turn in investor positioning, we would NOT be surprised to see profit booking in these names over the next few weeks, though it could likely require a market cool off.

 

On a pure operating framework we highlight the following trends:

 

a) Steel- Spreads remain elevated, domestic prices steady, while demand weak: Raw Material (Iron ore + coking coal) have fallen at a faster rate than steel prices, implying spread expansion. This is particularly visible in Europe, and we expect this to flow through to TATA’s Q1/Q2 FY15 numbers. Domestic demand in India remains weak, while prices are steady.

b) Aluminum and Zinc- Prices remain elevated v/s March quarter: LME prices remain elevated, with premiums for aluminum increasing.

c) COAL India continues to miss targets (April and May): While the stock remains bid up on ‘reform expectations’ the company missed production and off take targets for April and May. Arguably investors are looking at FY17/18/19 estimates (as some told us on our downgrade), however continuous disappointment on operating numbers would be challenge to the ‘Bulls’.

 

What would you buy NOW?: This is the one common question we are getting from investors. While investors are now willing to look at stocks on FY17 and FY18, we are comfortable with a valuation framework on FY16 as of now, given the visibility. On this parameter, there is still potential upside v/s our PT on TATA, Hindalco and JSW Steel; the latter two have relatively underperformed in the last 1-2 weeks.

 

Change in FII portfolio weights (March 2010 – March 2014)

Source: CMIE, J.P. Morgan. Data for BSE 500 universe

 

Global Steel YTD’14 stock Performance

Source: Bloomberg

 

Global Non-Ferrous YTD’14 stock Performance

Source: Bloomberg

 

Global Steel CY15/FY16 EV/EBITDA  

Source: Company reports, J.P. Morgan estimates

 

Global Non-Ferrous CY15/FY16 EV/EBITDA

Source: Bloomberg

 

YTD performance of Zinc, Aluminum and Steel Spread

 

Source: Bloomberg, J.P. Morgan estimates

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

Technicals: Gold, copper, Crude oil, zinc, natural gas :: Business Line

Metals & Mining - Q3FY14 Results Preview - Disappointment in store after sharp recent run-up :: Centrum

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

--