Prefer Hind Zinc followed by Tata Steel, CIL: Angel Broking

In an interview to CNBC-TV18 Bhavesh Chauhan of Angel Broking reviewed earnings of Tata Steel and Coal India.

Despite disappointing earnings, Angel Broking is bullish on Tata Steel at these levels. "The stock is available at reasonably cheap valuations. We have a buy rating on this stock. We will lower our target price a little bit from Rs 499 that was there earlier," he elaborated. Given Coal India’s better than expected Q1 earnings, the broking firm is likely to upgrade the stock from neutral to accumulate. Chauhan expects Hindalco to see 20% decline in net profit due to lower profitability from aluminum business. "Given the current levels of aluminum price, we don’t believe that Mahan project will be profitable. We have a contra call on Hindalco and we are neutral at these levels." Meanwhile, he would prefer Hindustan Zinc followed by Tata Steel and Coal India from this space. Below is the edited transcript of Chauhan’s interview with CNBC-TV18. Q: Tata Steel hasn’t moved much despite a poor set of numbers. What did you make in terms of a review of the Tata Steel numbers and what is your call on the stock? A: The results were disappointing because of weak performance from its European operations. For the last three four quarters we have seen that European operations have disappointed and that is now priced into the market. Going forward, we are bullish at these levels. The stock is available at reasonably cheap valuations. Going forward, the Brownfield expansion from Jamshedpur should come in from next quarter onwards. Apart from that there will be higher volumes in FY14 from those profitable operations. We have a buy rating on this stock. We will lower our target price a little bit from Rs 499 that was there earlier. Q: What are you expecting from Hindalco by way of a profit? We were getting a polled number of about Rs 500-520 crore. Does that square with what you are expecting, that would be down 20%? A: We are also expecting 20% decline in net profit at Rs 508 crore for Hindalco because of lower profitability from aluminum business. In that space there is a pressure not only because of declining realizations, but also higher input costs. Q: At this level does that reflect the cut in profit? How are you looking at the full year and therefore the stock? A: For the full year the stock will be driven more or less by its upcoming projects. It is in the verge of massive expansion plans, but having said that we have seen delays over the last one and a half years. We continue to expect delays in the Mahan project since coal not coming in atleast for 18 months from now. Given the current levels of aluminum price, we don’t believe that Mahan project will be profitable. We have a contra call on Hindalco and we are neutral at these levels. _PAGEBREAK_ Q: How worried would you be about Tata Steel’s European operations going forward, any sort of estimates you are working with for the remaining part of the fiscal? A: Its EBITDA per tonne stood at USD 35 in Q1, we were expecting close to USD 50. Now we will probably lower our EBITDA estimates at European operations. It is very challenging to foresee a very turnaround situation in the European operations. Having said that a lot of it is already priced into the stock. Q: You also have a view on Nalco we understand which comes out with numbers, what is your expectation on the same? A: For Nalco, we are expecting profit of close to Rs 200-208 crore or something. We have a neutral rating on this stock because of higher valuations; it is trading close to 6.5 times FY14 EV/EBITDA. Q: How are you looking at the Coal India numbers, I guess contraction in margins was expected because of the wage hike but how does it go from hereon you think? A: Coal India results were better than our expectations because of lower than expected staff cost. From the last two quarters it has surprised us, in Q4 it surprised us with higher realizations and this time around with lower cost. We are likely to upgrade the stock to an accumulate from neutral. We think the volume growth of 6% is something that market is looking at. Last year we saw zero volume growth, but going forward with the rains not that heavy this year we expect the volume growth of 5-6% atleast in FY13. Q: What would your pecking order be within the commodities space? A: Our top pick is Hindustan Zinc, followed by Tata Steel and then Coal India. Q: Tata Steel’s net debt has increased, demand doesn’t look like will improve, so they may not have much elbow room to realizations, would there not be a problem servicing Rs 55,000 crore of debt? A: As far as its Indian operation is concerned, it is quite profitable. They will be looking to service that debt from profitable Indian operations. Q: What are you looking at by way of an year end EPS or even an FY14 EPS? A: We are working on the numbers, but our rough estimates would be close to Rs 54 for FY13 and close to Rs 62 for FY14.