Jan 08, 2013 10:35 AM IST | Source: CNBC-TV18

Q3 results: What to expect from SAIL, Tata Steel

In an interview to CNBC-TV18, Varun Lohchab, MD & Co-Head of Research, Religare Capital Markets said that from result perspective, it will not be a great quarter especially for the steel companies.

All the listed companies will declare their results for the quarter ended December 31, 2012 in January.

In an interview to CNBC-TV18, Varun Lohchab, managing director and co-head of research, Religare Capital Markets said that from the result perspective, it will not be a great quarter for the steel companies. "Q3 might be weak for JSW Steel and Tata Steel and even Steel Authority of India (SAIL) to some extent. We believe market will look through that because Q4 should be a better quarter," he added.

Also read: JSW Steel has target at Rs 950; SL Rs 800: Bothra

He believed that Q3 will be the worst quarter from realisations perspective. "At that time one will see quarter-on-quarter decline, especially in the steel space. There will be some uptick in domestic steel prices from Q4," he asserted 

Below is the edited transcript of his interview to CNBC-TV18.

Q: The result season is impending, which number would you track very closely something that will really lend direction to the stock?  Which one are you backing at this point in terms of stock performance?

A: From result perspective we don't think it will be a great quarter especially for the steel companies. The domestic realizations were under pressure in this quarter. Even the production numbers from some of the companies are going to be lackluster.

However, we believe that Q3 will be the worst quarter from realizations perspective. Starting Q4 one will see some up tick in domestic steel prices. So, the stocks which we continue to like in the metal space are Tata Steel among the steel pack and Sterlite Industries and Hindustan Zinc in the nonferrous pack. We also like National Mineral Development Corporation (NMDC).

Q: In terms of results do you think that there will be major disappointments in Q3 from any quarter?

A: We don’t think there will be major disappointments but one will see quarter on quarter decline especially in the steel space. So, if you look at Tata Steel for example we believe that domestic realizations will be down on quarter on quarter basis. The volumes will be up and Corus will again be weak on quarter on quarter basis. So, Tata Steel will be a disappointment. JSW Steel could disappoint because their production volumes have been under pressure.

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Q: Therefore at the moment would you be negative on the steel companies other than Tata Steel?

A: Q3 will probably be the worst quarter. We have seen most of the steel companies starting to raise prices from January. After a long time the domestic steel prices are at a discount to landed import parity prices. Chinese steel prices have moved up in last three months and now they are up around 11 percent. We believe that domestic steel prices will also be headed up. So, Q3 might be weak for JSW Steel and Tata Steel and even Steel Authority of India (SAIL) to some extent. We believe market will look through that because Q4 should be a better quarter.

Q: The way in which prices are panning out we did see an up tick in steel prices globally. But along with it the iron ore and coal prices have also climbed up just a bit. Do you think margins will be better in the four quarters of 2013?

A: It depends on which player you are talking about. Like in case of Tata Steel India the operations are far more integrated. So, they have captive iron ore and also coking coal to a large extent. So, for them we believe EBITDA per tonne should improve from Q4. And the coke oven battery has got commissioned so they were importing coke till now.

Therefore the cost of production was up in the last couple of quarters. We believe that will start trending down from Q4. Some of the non integrated players like Corus in Europe or JSW Steel may not get the benefit as coking coal prices move up. Domestic iron ore prices anyway don’t follow the global iron ore prices on a parity basis. So, we don’t believe domestic iron ore prices will go up a lot.

Q: Hindustan Unilever (HUL) is one of the top losers right now. What's the strategy you are recommending to investors at this point? Marico had some restructuring. Betting on midcaps at this point or would you still stay with the likes of ITC?

A: Both for HUL and ITC, we have been cautious for sometime. We downgraded both of them in October and we continue to maintain that stance. Valuations has really caped the upside from current levels. So, we would look for better entry opportunities. HUL close to Rs 500 starts looking okay and ITC around Rs 270-275 levels.

We are not in a hurry to make investors buy these stocks at these levels. Quarter will be quite decent from both of them. We believe HUL and ITC will report good earnings growth in this quarter. However, the same is also reflected in valuation. We believe they will just be sideways for some more time. On the midcap side we have got select buy stocks in FMCG which is Dabur, Emami and GSK Consumer. So, there is no clear preference towards midcap or large cap. Both of them look expensive to us. Overall, on FMCG space we are neutral right now.

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