RBS' Q3 earnings expectations for metal sector

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RBS' Q3 earnings expectations for metal sector

Many metal companies like Hindalco Industries, Sterlite Industries (India) and Steel Authority of India (SAIL) will soon announce their Q3FY10 results. In an interview with CNBC-TV18, Rahul Jain, Assistant Director, RBS, talks about his expectations from these companies.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ News and Notices about Hindalco See interviews with Hindalco Management See what other Experts & Brokerages are saying about Hindalco See previous Results of Hindalco Hindalco BSE | NSE 29/05/12 Are Mutual Funds betting on Hindalco?

Q: There were some concerns around SAIL and it was expected that it would be the most lacklustre of all steel numbers we see this quarter. What do you have pencilled in?

A: In case of SAIL, they have had low employee cost provision in the first half, which they would spread it over the second half, which is why you will see a sharp increase in the cost of employees. So that's why you wouldn't see as high number for SAIL compared to some of the other names.

But SAIL, all said and done, is on a massive expansion phase and key thing over there also would be the huge pipeline which they have spread out over the next three-four years, increasing capacity from 12 million tonne to 20 million tonne, all of this will be in same brownfield locations. So you would expect that they would be commissioning much faster than some of the other steel plant. So quarterly numbers won't be great, but we like the stock and we have a buy on the company.

Q: Coming to Hindalco again- how is Novelis doing right now? What do you expect to see from the Novelis front?

A: Novelis has been reporting fairly robust numbers over the last two quarters. What goes for Novelis is a large part of their earnings, which is almost 60% of sales, come from beverage can market. Beverage can market has been fairly robust and the decline in volumes have been very low in North America compared to some of the other aluminium products, so Novelis should report numbers. But in the Q3, there is seasonable impact; there is generally a lower consumption of can products in the Q3, but on annualised basis we should expect an EBITDA in the range of USD 600-700 million. Going forward, over the next two-three years, going by the plans which they have, the EBITDA range should move up in upwards of USD 750-800 million.

Novelis has been a surprise pack; a lot of people have ridden off the company because of some of the derivative contract losses which they had, but all that is a thing of a past now and they do not have any fix price ceiling contracts now. Novelis is actually turned out to be pretty good bet so far and we would expect steady improvement in earnings. I think the way people look at the company also would undergo a change, its more of a free cash flow base company, which does a value addition on what aluminium it buys and its not a pure commodity company to say, since its 60% FMCG linked company so its not exactly metal company to say.