Metal space: Fishing in turbulent waters says PINC Research

PINC Research has come out with its report on metal space. The research firm recommends reduce rating on Hindalco.

Hindalco: We are cautious on Hindalco's prospects and estimate EPS to decline at an 18% CAGR over FY12E-FY14E on lower LME prices, rising energy cost, project concerns with delays in captive bauxite, alumina & coal, and high financial leverage (1.3x FY13E net D/E). Despite 53% decline in 2011, we believe it is still early to turn +ve on Hindalco and initiate coverage with REDUCE.

Sterlite Industries: We believe the concerns on stake increase in loss-making associate VAL are unfounded and overdone as Sterlite has clarified that equity infusion in VAL would be in proportion to their 29.5% stake. Further, CMP is underplaying 13.8% EPS CAGR over FY12E-FY14E led by highly cost efficient zinc business (50%+ OPM), 107% volume CAGR in energy biz and strong balance sheet (despite excluding Rs89bn of loan given to VAL). Initiate coverage with BUY.

Hindustan Zinc: Earnings to be supported by volume growth on recently expanded capacity, >30years mine life, rising share of silver profit, highly cost efficient operations, and strong balance sheet despite volatile LME. To factor-in low return on surplus cash, we value surplus cash at 20% disc. To book value & maintain ACCUMULATE.

National Aluminium (NALCO): We estimate NALCO's EBITDA to decline at 8% CAGR and EPS at 10% CAGR over FY12E-FY14E on lower LME prices and higher energy & labor cost. Further, we are concerned about its foray in unrelated businesses (wind, nuclear power) & geography (Indonesia). We value cash at 20% disc to BV; downgrade to SELL.

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