Angel Broking has come out with its report on metals. The research firm remains weak on metal space. Tata Steel, Hindalco, Hindustan Zinc and NMDC top picks in metal space.
Robust top line, but high input costs dent operating profit growth: Most metal companies witnessed robust top-line growth (average growth of 15.4% yoy) during 2QFY2012 mainly due to higher realization. However, most steel and aluminium players reported a decrease in profitability on account of higher input costs. Nevertheless, Coal India, Hindustan Zinc, Sterlite Industries and NMDC reported robust profit growth, as these companies are highly leveraged to any increase in commodity prices. Average EBITDA for our sample universe grew by only 4.7% yoy despite top-line growth of 15.4% yoy. EBITDA of steel and aluminium players decreased by 26.1% on account of higher prices of key inputs. Despite modest growth in operating profit, other income recorded strong growth of 80.6% yoy during the quarter. Hence, average adjusted PAT for our sample companies grew by 16.5% yoy. However, some companies reported massive forex losses on account of a sharp depreciation of INR against the USD. Hence, reported PAT decreased by 38.2% yoy during the quarter.
Some players delay expansion plans: On account of subdued demand, slowdown in capex cycle, higher interest rates and weak financial markets, some of the companies have delayed their expansion plans. Specifically, SAIL has reported delays in some of its brownfield projects, while Hindalco has delayed its Mahan smelter by a quarter.
Near-term outlook remains gloomy, although INR depreciation mutes price declines: Steel consumption in India grew by only 1.8% in 1HFY2012 on account of subdued demand. Looking ahead, we expect steel consumption to pick up in 2HFY2012. However, there are some concerns owing to slowdown in capex cycle, higher interest rates and slowdown in construction and auto demand, among others. Globally, steel prices declined by 12-20% during June-November 2011. However, domestic steel prices have remained flat on account of INR depreciation against the USD. Similarly, although internationally base metal prices have fallen sharply over the past three months, the decline in domestic prices has been muted due to INR depreciation against the USD.
Valuations inexpensive, but sentiment remains weak: Metal stocks have been battered over the last one year on account of escalating debt crisis, subdued domestic demand and rising input costs without the corresponding increase in finished product prices. Nevertheless, we believe the recent decline has left some of the stocks undervalued. We like companies with captive assets, strong visibility over expansion plans, low leverage levels and compelling valuations. Hence, our top picks are Tata Steel, Hindalco, Hindustan Zinc and NMDC.
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