Which stocks to buy/sell in non-ferrous metal space?

Motilal Oswal has come out with a report on Non-ferrous metal stocks. Stocks are Sterlite Industries, Hindalco, Hindustan Zinc and Nalco.

Non-ferrous industry-getting new projects a challenge: In the non-ferrous space, we like zinc. The outlook on zinc prices is bullish due to global supply-side constraints. The Indian aluminum sector is facing challenges due to shortage of coal, rising input costs, and project delays. The copper business in India is limited to custom smelting and is, therefore, less significant. Sterlite Industries: Sterlite has underperformed due to a trail of setbacks - bauxite mining, minority buyouts, Tuticorin smelter, etc. Yet, earnings growth remains intact. The stock now trades at a significant discount to its intrinsic valuation of Rs221 (based on SOTP), implying that negatives are factored in. We believe the stock will get re-rated once projects get delivered. Maintain Buy. Hindalco: We recently cut our FY11E EPS by 9% to model lower than expected 3QFY11 results for both standalone and Novelis. We have cut our volume assumptions of alumina and metal for FY12 and FY13 to incorporate delays in commissioning of projects. Our FY12 alumina production estimate is cut from 1.8m tons to 1.5m tons. Similarly, our FY13 metal production estimate is cut from 0.8m tons to 0.75m tons. We have cut our EPS estimates by 3% to Rs17.7 for FY12 and by 4% to Rs20 for FY13. The stock trades at 11.8x FY12E EPS and an EV of 6.5x FY12E EBITDA. Maintain Buy. Hindustan Zinc: We remain positive on Hindustan Zinc due to strong volume growth of zinc metal and sharper growth in lead and silver production over the next few years. The stock trades at 10.3x FY12E EPS and an EV of 5.8x FY12E EBITDA, assuming zinc and lead prices of US$2,200/ton. Every US$100/ton change in LME prices impacts EPS by 5-6%. Maintain Buy.
 
Nalco: We have cut our FY11E EPS by 11% to Rs16.1 to factor lower than expected 3QFY11 results and rising coal costs. We have also reduced our assumption of coal linkage from 90% to 80% for FY12 and FY13. Our EPS estimates are cut from Rs22.7 to Rs18.1 for FY12 and from Rs24.5 to Rs17.4 for FY13. The stock trades at 25.7x FY12E EPS and an EV of 14.1x FY12E EBITDA. Maintain Sell. Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management.Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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