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

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.

Source : Equity Bulls

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