NMDC, Hind Zinc, Tata Steel top picks in metals: Angel

Angel Broking's metals Q4FY2013 result analysis

Mixed top-line performance: Steel companies reported a subdued performance during 4QFY2013. SAIL and JSW Steel saw a net sales decline of 11.2 percent and 2.8 percent yoy, respectively, whereas Tata Steel reported a marginal 1.9 percent yoy improvement in its net sales. Amongst the non-ferrous players all companies except Hindalco Industries (Hindalco) reported an increase in net sales on the back of higher volumes. Their top-line growth was also higher than expectations. All the miners namely Coal India, NMDC and MOIL showed an increase in their top-line due to higher volumes.

Steel companies’ margins remained under pressure: Among the steel companies, SAIL reported a 50.4 percent fall in operating profits due to higher labor costs and other expenses. JSW Steel and Tata Steel’s EBITDA grew 2.8 percent and 37.4 percent yoy respectively due to cost efficiencies. In the non-ferrous sector, except for Hindalco, all the remaining companies reported a jump in operating profits which was in line with increase in top-line. Among mining companies, only NMDC faced severe margin pressures during the quarter due to higher employee costs and overheads. Coal India and Nalco however posted strong growth in their operating profits.

Outlook on steel: Globally, sea-borne iron ore prices declined sharply during April - May 2013. The current iron ore prices are in the range of USD115- 120/tonne. Going forward, we do not expect any significant decline in iron ore prices as the current prices are near marginal cost of production as against Chinese miners. Domestic iron ore prices have also come off sharply over the past five months due to sluggish steel demand in India which has also led to lower steel/sponge iron prices in the country. Contracted coking coal prices have declined gradually over the past one year. A decline in coking coal prices is expected to benefit Indian steelmakers over FY2014; however, the benefits would be offset by lower steel prices which would hurt margins of the steel players.

Outlook on non-ferrous: Non-ferrous companies are expected to continue to face a double whammy of declining product prices coupled with higher input costs. Base metal prices have declined steeply over the past one year; we expect realizations growth to remain muted during FY2014 (partially offset by INR depreciation against the USD). Further, although several aluminium companies (globally) have announced production cuts, we are yet to see any meaningful decline in production. Thus, lower realizations coupled with higher and sticky prices of key inputs are expected to hit margins of non-ferrous companies during FY2014 in our view. Nevertheless, we expect prices to improve in FY2015 as announced production cuts restore demand-supply mismatch in the industry.

Selectively we like some stocks: Metal stocks have underperformed over the past one year on account of global overcapacity, subdued domestic demand, decreasing prices, rising input costs and delays in obtaining procedural clearances for mines. Nevertheless, we believe that the recent fall has left some stocks undervalued. We like companies with captive assets, strong visibility on earnings growth over the coming few years, low leverage levels and inexpensive valuations. Hence, our top picks in the sector are NMDC, Hindustan Zinc and Tata Steel.

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