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Feb 25, 2013, 12.07 PM IST | Source: Moneycontrol.com

NMDC, Hind Zinc, Tata Steel top picks in metal space: Angel

Angel Broking has come out with its report on metal sector. According to the research firm, iron ore prices are expected to decline as significant newer capacities by global iron ore giants such as BHP Billiton, Rio Tinto and Vale hit the sea-borne markets.

Angel Broking has come out with its report on metal sector. According to the research firm, iron ore prices are expected to decline as significant newer capacities by global iron ore giants such as BHP Billiton, Rio Tinto and Vale hit the sea-borne markets. NMDC , Hindustan Zinc and Tata Steel are the top picks in the space, says Angel.

"Most of the companies under our coverage reported a disappointing top-line performance during 3QFY2013. Among steel players SAIL and Tata Steel saw a net sales decline of 0.9% and 3.0% yoy, respectively, whereas JSW Steel reported a 5.3% yoy improvement in net sales. All the non-ferrous players reported an increase in net sales on the back of higher volumes; however, their top-line growth was lower than expectations. Among the miners, except for Coal India, all other companies’ top-lines declined and their volumes were below our estimates.

Margins remain under pressure: Among the steel companies, SAIL reported a 28.0% fall in operating profits due to higher labor costs and other expenses. JSW Steel’s EBITDA grew 4.9% yoy which was in line with increase in sales. In the non-ferrous sector, except for Hindustan Zinc (HZL) and Nalco, all the remaining companies reported a fall in operating profits on the back of lower realizations and rising costs. Among mining companies, both Coal India and NMDC faced severe margin pressures during the quarter. NMDC’s margins were hit by lower volumes while Coal India’s EBITDA declined by 4.3% yoy despite a 12.9% growth in net sales due to higher power and fuel costs and other expenditure.

Outlook on steel: Globally, sea-borne iron ore prices declined sharply during April - August 2012; however, from the August lows, there has been a sharp rise in prices (by over 60%). The current iron ore prices are in the range of US$150-160/tonne. Going forward, we expect iron ore prices to decline as significant newer capacities by global iron ore giants such as BHP Billiton, Rio Tinto and Vale hit the sea-borne markets. Domestic iron ore prices have remained firm on account of mining ban in Karnataka and government’s stricter stance on illegal mining in the mineral-rich states of Odisha and Goa. Contracted coking coal prices have declined steeply over the past one year; thus is expected to benefit Indian steelmakers during FY2014.

Outlook on non-ferrous: Non-ferrous companies are expected to continue to face a double whammy of declining product prices coupled with higher input costs. Base metal prices have declined steeply over the past one year; we expect realizations growth to remain muted during FY2014 (partially offset by INR depreciation against the USD). Further, although several aluminium companies (globally) have announced production cuts, we are yet to see any meaningful decline in production. Thus, lower realizations coupled with higher and sticky prices of key inputs are expected to hit margins of non-ferrous companies during FY2014 in our view. Nevertheless, we expect prices to improve in FY2015 as announced production cuts restore demand-supply mismatch during FY2015.

Selectively we like some stocks: Metal stocks have underperformed over the past one year on account of global overcapacity, subdued domestic demand, decreasing prices, rising input costs and delays in obtaining procedural clearances for mines. Nevertheless, we believe that the recent fall has left some stocks undervalued. We like companies with captive assets, strong visibility on earnings growth over the coming few years, low leverage levels and inexpensive valuations. Hence, our top picks are NMDC, Hindustan Zinc and Tata Steel," says Angel Broking research report.

Public holding more than 90% in Indian cos

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