Metals & Mining - Q2FY13 Results Preview - Another weak quarter due to subdued prices and demand - Centrum

We expect a subdued show from our metals universe yet again due to i) sustained pressure on volumes (flat sequentially) due to lacklustre demand ii) lower sequential realizations by 3-5% (due to global price fall and rupee appreciation) and iii) no substantial decrease in raw material costs sequentially due to the lag effect and NMDC iron ore price hikes. We expect a drop in margins sequentially for steel players (due to lower price impact) and miners (due to lower volumes impact during monsoons) and expect PAT to remain under pressure. Notable outperformers with better YoY performance would be mainly miners like Coal India (CIL), GMDC and NMDC. We maintain our cautious stance on the ferrous space but remain positive on the mining space on account of volume growth, better pricing, low costs and attractive valuations.

Sales volume: To remain subdued except for Coal India - We expect volumes to remain flat to lower YoY for all companies under our coverage universe except Coal India (CIL), GMDC, JSW steel and Godawari power (GPIL). CIL and JSW are expected to witness sales volume growth of 9.9% YoY and 10.4% respectively.

Steel realizations to drop by 3-5% sequentially: Domestic steel prices fell by 3-5% progressively during the quarter on account of global price fall and stronger rupee and base metal prices remained week overall barring recovery towards the end of quarter. Among miners, NMDC is expected to benefit from price hikes.

Margins to be under pressure on realizations drop: Margins are expected to decline by 100-300 bps QoQ for steel players in our universe due to lower realizations. Miners are expected to see higher margins on account of volume growth and better pricing power. Sesa Goa would see huge decline in profitability due to low volumes and substantial fall in global iron ore prices. YoY margin improvements are expected from CIL, NMDC, GMDC and GPIL.

Reported net profits to remain weak: We expect pressure on PAT due to lower margins and higher interest costs but do not anticipate substantial MTM forex losses as rupee has regained strength towards end of the quarter.

Maintain cautious view on the ferrous space and positive stance on the mining space in metals: We remain cautious on the domestic ferrous space amidst tough operational environment and slow pick up in investment cycle growth. We expect raw material price pressure to ease going ahead but fall in realizations would negate this to a large extent. We maintain Sell on Tata Steel and Neutral on SAIL and JSW Steel. We are positive on the mining space on the back of volume growth, better pricing power in domestic markets and strong cash rich balance sheets of the major miners. We maintain buy on mining stocks like NMDC, GMDC and Coal India on attractive valuations and volume growth. We remain positive on the non-ferrous space as we see upward movement in LME prices going ahead and volume growth on account of completed expansions. We recommend buy on HZL and Sterlite Inds.

Source : Equity Bulls

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