Metals - Likely earnings growth revival on volume, input cost fall - Avendus

A decline in global steel production in the last one year has led to a fall in input costs. This has helped enhance the EBITDA/tonne for steel majors, as the spread between steel prices and input costs rises. With the commissioning of new capacity, imports into India are likely to reduce. Thus, we forecast volume growth among steel majors. However, global aluminium prices continue to be adversely impacted by the Chinese policy of providing subsidies and surplus capacity. Nonferrous players such as HNDL have had project delays. The setback has been due to the delay in government approvals for mineral resources. Hence, HNDL's earnings momentum is weaker compared to ferrous players. Revival in the consensus net profit for the BSE metal index during FY13f-FY14f after a 16.8% decline in FY12 is likely to lead to a stable valuation multiple. Hence, we prefer ferrous players compared to non-ferrous players. Upgrade SAIL to Buy and HNDL to Add on a stock price correction; maintain Buy on JSTL and TATA.

Volume growth, fall in input costs likely to boost FY13f-FY15f EBITDA

Global steel production has continued to decelerate in Q1FY13 with all major regions slowing down. This has led to a decline of up to c47% in input costs such as iron ore and coking coal prices. We forecast an expansion of EBITDA margins for domestic steel players during FY13f-FY15f, supported by growth in the EBITDA/tonne due to an improving spread between steel prices and input costs. Substitution of imports owing to capacity addition is likely to drive growth in the near term. Revival in domestic demand on a potential decrease in interest rates is likely to be an additional trigger for domestic steel players.

China's power cost, premium likely to restrict aluminium price rise

Global aluminium industry has reported surplus since 2008. This was further accentuated by weakening global demand in 2012, leading to lower aluminium prices. However, despite production cuts, a rebound in aluminium prices is unlikely as Chinese provinces announced power subsidies for its aluminium industry from May12. This subsidy reduced production costs for Chinese players by USD150/tonne. Furthermore, aluminium premiums surged USD90/tonne for the quarter ended Sep12, delaying the closure of high cost smelters. Hence, we forecast the surplus scenario in the industry to prevail, going ahead, restricting a rebound in LME aluminium prices.

Valuation multiple likely to stabilize as FY13f-FY14f earnings rebound

The FY13f-FY14f consensus net profit is likely to increase at a CAGR of 11%; this is mainly driven by volume growth due to capacity addition and expansion of the EBITDA margin on a decline in raw material costs, which is likely to be higher compared to finished product prices. This is likely to stabilize the contraction in the valuation multiple of the metals index, which dropped up to 26% in FY12 owing to a 16.8% y-o-y fall in net profit. We upgrade our rating on SAIL from Add to Buy and HNDL from Hold to Add on a stock price correction. We maintain our Buy rating on JSTL and TATA.

Source : Equity Bulls

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