Nirmal Bang maintains negative rating on metal

Nirmal Bang has come out with its report on metal sector. The research firm retains negative view on the sector while maintain buy rating on Hindustan Zinc (HZL).

Nirmal Bang report on metal sector:

As many as eight out of nine companies posted higher-than-estimated EBITDA verses our estimates for 4QFY12, while six companies posted higher EBITDA than consensus estimates. Stable price outlook coupled with no material changes in volume assumption resulted in a 0.1% and 1.3% drop in EBITDA and PAT estimates, respectively, for FY13E. We have also downgraded our FY14E EBITDA and PAT estimates by 1.5% each. Overall, the metal sector (sample size - 49 companies with market cap above Rs3bn) reported a 19% YoY drop in EBITDA, while it was up 21% QoQ during the quarter. PAT was down 23% YoY, while it was up 34% QoQ. Except NMDC, which has been upgraded to Hold due to attractive valuation, our rating has remained unchanged for rest of the sector. We retain our negative view on the sector with a Buy rating on Hindustan Zinc (HZL), a defensive stock, and Sesa Goa/Sterlite Industries (over 70% of earnings comes from zinc and oil segments) and a Hold rating on NMDC. We retain our Sell ratings on other stocks in our coverage i.e. Tata Steel, JSW Steel, SAIL, Hindalco Industries and NALCO.

A quarter of marginal outperformance: Our metal universe reported marginally better performance verses to our as well as consensus expectations. Aggregate EBITDA was 2%/4% higher than our/consensus estimates, respectively, largely driven by strong performance from NALCO, JSW Steel and Hindalco. Reported PAT was 5%/3% above our/consensus estimates due to strong performance from the above companies. SAIL remained the most notable disappointment on the EBITDA front, although, PAT was above expectation due to tax reversal.
 
Marginal downgrades for FY13E and FY14E: Due to stable pricing outlook in ferrous and nonferrous segment, coupled with no material change in the management’s commentary, led to a marginal change in FY13 aggregate estimates. Our coverage universe’s EBITDA/PAT estimates have been revised downward by 0.1%/1.3%, respectively, for FY13E, while the same have been revised downwards by 1.5% each for FY14E.

4QFY12 performance- recovery from lower levels, but still down from peak: The entire metal sector posted 21%/34% QoQ increase in EBITDA/PAT, respectively, for 4QFY12, largely driven by strong seasonal performance, higher metal prices and downward costs scenario. But, on YoY basis, EBITDA/PAT were down 19%/23%, respectively, due to higher costs and lower metal realisation. For FY12, the sector reported 6%/7% drop in EBITDA/PAT, respectively.

FY13 saw steep earnings downgrades so far, more downgrades unlikely: Due to dismal outlook on the domestic as well as global economic front, there has been a series of earnings downgrades in the metal sector. Companies in our coverage universe have witnessed 24%/ 28% EBITDA/PAT downgrades, respectively, for FY13E in the past one year. There has been a 9%/12% cut in EBITDA/PAT estimates for FY14E in the past six months. We do not foresee any major downgrades in coming quarters as metal price assumptions and volume estimates have moderated significantly in the past one year. Our aggregate EBITDA estimates are just 0.1% higher and 0.9% lower for FY13E and FY14E, while our PAT estimates are 7.0% and 8.0% lower, respectively, for the same period due to higher interest costs and depreciation charges. 

Bodies Corporate holding more than 50% in Indian cos  

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