Steel demand muted; HZL, Hindalco top picks: Edelweiss

Prasad Baji of Edelweiss Securities believes that in the short term steel demand has been muted and has not picked up enough to absorb a price hike. Imported coal price moved up over 8 percent to USD 136/tonne and following which steel producers are attempting to raise steel price from September 1.

Rupee depreciation will be beneficial for non-ferrous stocks. Hindustan Zinc and Hindalco are his top picks in the metal space. He is also bullish on Tata Steel. He expects best volume growth from the company and also sees some improvement indication from Europe business margins. Below is the verbatim transcript of his interview to CNBC-TV18 Q: You just heard Jindal Steel and Power Limited (JSPL) talk about their impending price hikes, how would you approach that stock now? A: Certainly the steel producers seem to be attempting a price hike in September but in the short-term, the demand has not yet picked up to take that kind of price hike. Expectation is that at least the current prices will be protected. Possibly in the March quarter, we may see a real price increase to recover a cost as such. Q: Which of the companies will be most advantaged by the rupee depreciation you think and their ability to raise prices or the Sensex stocks for instance? A: Rupee depreciation will be more beneficial for the non-ferrous stocks rather than the ferrous stocks. In the last three years the blended realisations of aluminium and zinc are up around 15 percent whereas blended steel realisations are flat. Typically steel realisations should also move up, But, with the steel demand being weaker, the pricing power is not that strong. Pricing power is certainly better for the non-ferrous stocks. Q: What would your recommendations be in the metal space and what would be the key reasons for buying those stocks? A: Our top picks are Hindustan Zinc, Hindalco Industries and Tata Steel. On Hindustan Zinc and Hindalco Industries, one common thing is the non-ferrous pack will do better. Within that Hindustan Zinc – there is mine metal volume growth of 10-15 percent this year and next year also could be around 5-10 percent. So volume growth is certainly playing there. The long standing advantages of low cash cost, cash rich balance sheet are present. For Hindalco Industries, Novelis is a key driver we believe, which is independent of the aluminium prices, the margins being not linked to aluminium prices. They are also having significant volume growth. Over the next two years they will have 5.2 million tonne of capacity that they are adding, which will ramp up on 3 million tonne base. In India, Hindalco Industries, the projects will not give meaningful contribution in the one-year perspective at the profit after tax (PAT) level. However, the projects having got completed, the risk has reduced substantially on the company and the projects. That will give a re-rating boost and besides, aluminium prices tend to benefit from the rupee depreciation that will anyway help. On Tata finally, our pick is there because two reasons, one is that we will see the best volume growth in India from Tata. Obviously they have the high margin because of captive resources in India. The Europe side, the leading indicators are showing some kind of improvement. I don’t think we will see a strong recovery but at least a modest improvement will mean that the drag that was there in the European operations will not be there as was there in the last couple of years. So that should help. Q: Do you like any of the other metal stocks like JSW, JSPL we just spoke to? A: We have a neutral stance there. Obviously these stocks are attractive in their valuations but in that top picks, the triggers are much stronger than these two stocks.