Result review | Metals

February 21, 2013 Bhavesh Chauhan

Tel: 022- 39357800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

3QFY2013 Result Analysis

Profit remains under pressure
Subdued top-line performance: Most of the companies under our coverage reported a disappointing top-line performance during 3QFY2013. Among steel players SAIL and Tata Steel saw a net sales decline of 0.9% and 3.0% yoy, respectively, whereas JSW Steel reported a 5.3% yoy improvement in net sales. All the non-ferrous players reported an increase in net sales on the back of higher volumes; however, their top-line growth was lower than expectations. Among the miners, except for Coal India, all other companies top-lines declined and their volumes were below our estimates. Margins remain under pressure: Among the steel companies, SAIL reported a 28.0% fall in operating profits due to higher labor costs and other expenses. JSW Steels EBITDA grew 4.9% yoy which was in line with increase in sales. In the non-ferrous sector, except for Hindustan Zinc (HZL) and Nalco, all the remaining companies reported a fall in operating profits on the back of lower realizations and rising costs. Among mining companies, both Coal India and NMDC faced severe margin pressures during the quarter. NMDCs margins were hit by lower volumes while Coal Indias EBITDA declined by 4.3% yoy despite a 12.9% growth in net sales due to higher power and fuel costs and other expenditure. Outlook on steel: Globally, sea-borne iron ore prices declined sharply during April - August 2012; however, from the August lows, there has been a sharp rise in prices (by over 60%). The current iron ore prices are in the range of US$150-160/tonne. Going forward, we expect iron ore prices to decline as significant newer capacities by global iron ore giants such as BHP Billiton, Rio Tinto and Vale hit the sea-borne markets. Domestic iron ore prices have remained firm on account of mining ban in Karnataka and governments stricter stance on illegal mining in the mineral-rich states of Odisha and Goa. Contracted coking coal prices have declined steeply over the past one year; thus is expected to benefit Indian steelmakers during FY2014. 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 during FY2015. 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 are NMDC, Hindustan Zinc and Tata Steel.
Please refer to important disclosures at the end of this report

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Metals | Result review

Subdued top-line performance: Steel companies reported a subdued performance during 3QFY2013. SAIL and Tata Steel both saw a net sales decline of 0.9% and 3.0% yoy, respectively, whereas JSW Steel reported a 5.3% yoy improvement in net sales. All the non-ferrous players namely Sterlite, Nalco, Hindalco and Hindustan Zinc reported an increase in net sales on the back of higher volumes; however, their top-line growth was lower than expectations. Among the miners, except for Coal India, all other companies showed a decrease in top-line due to lower volumes.

Exhibit 1: 3QFY2013 - Top-line performance

35,000 30,000 25,000
(` cr)

Exhibit 2: Top-line - variance from expectation

10 5 0
(%)

3QFY13

3QFY12

20,000 15,000 10,000 5,000 0

NMDC Nalco Tata Steel SAIL MOIL Coal India Hindal co HZL Sterlite JSW Steel

(5) (10) (15) (20)

MOIL SAIL Tata Steel NMDC Nalco Coal India Hindalco HZL
HZL

Source: Company, Angel Research

Source: Company, Angel Research

Higher power and labor costs dent operating profits: Among the steel companies, SAIL reported a 28.0% fall in operating profits due to higher labor costs and other expenses. JSW Steels EBITDA grew 4.9% yoy which was in line with an increase in sales. In the non-ferrous sector, except for Hindustan Zinc and Nalco, all the remaining companies reported a fall in operating profits on the back of lower realizations and rising costs. Among mining companies, both Coal India and NMDC faced severe margin pressures during the quarter. NMDCs margins were hit by lower volumes and realizations while Coal Indias EBITDA declined by 4.3% yoy despite a 12.9% growth in net sales due to higher power and fuel costs and other expenditure.

Exhibit 3: 3QFY2013 Operating profit growth

6,000 5,000 4,000
(` cr)

Exhibit 4: Operating profit - variance from expectation

350 300 250 200 150 100 50 0 (50) (100)

2,000 1,000 0
MOIL SAIL Tata Steel NMDC Nalco Coal India Hindalco HZL JSW Steel Sterlite

(%)

3,000

MOIL

SAIL

Tata Steel

NMDC

Nalco

Coal India

Hindalco

3QFY13

3QFY12

Source: Company, Angel Research

Source: Company, Angel Research

February 21, 2013

JSW Steel

Sterlite

JSW Steel

Sterlite

Metals | Result review

Higher interest costs and depreciation dent PAT The interest costs for all the metal companies increased on an average of 44.3% yoy due to rising debt and capitalization of some projects. Depreciation costs were also higher due to many projects being capitalized in the previous three quarters of FY2013.

Exhibit 5: 3QFY2013 Adjusted PAT

5,000 4,000 3,000
(` cr)

Exhibit 6: Adjusted PAT -Variance from expectation

100 80 60
(%)

2,000 1,000 0
SAIL Tata Steel NMDC Nalco JSW Steel Sterlite

40 20 0 (20)

(1,000) (2,000)

Coal India

Hindalco

MOIL

HZL

(40)
MOIL SAIL Tata Steel NMDC Nalco Coal India Hindalco HZL JSW Steel Sterlite

3QFY13

3QFY12

Source: Company, Angel Research

Source: Company, Angel Research

Steel companies Outlook

Raw material prices have come off sharply
Globally, sea-borne iron ore prices declined sharply during April - August 2012; however, the prices have risen sharply (over 60%) from August lows. The current iron ore prices are in the range of US$150-160/tonne. Going forward, we expect iron ore prices to decline as significant newer capacities by global iron ore giants such as BHP Billiton, Rio Tinto and Vale hit the sea-borne markets. Domestic iron ore prices have remained firm on account of mining ban in Karnataka and governments stricter stance on illegal mining in the mineral-rich states of Odisha and Goa. Contracted coking coal prices have declined gradually over the past one year. A decline in coking coal prices is expected to benefit Indian steelmakers during FY2014, although INR depreciation would partially offset the decline in price of coking coal.

February 21, 2013

Metals | Result review

Exhibit 7: Iron ore prices have risen sharply..

165 155 145

Exhibit 8: ...while coking coal prices have come off

400 350 300
(US$/tonne)

(US $/tonne)

135 125 115 105 95 85 75 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13

250 200 150 100 50 0

Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jul-12 Apr-08 Apr-09 Apr-10 Apr-11 Oct-08 Oct-09 Oct-10 Oct-11 Apr-12 Oct-12
Nov-12

Iron ore fines CFR 63.5% Fe

Coking coal contract prices (fob, Australia)

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

.and steel prices have declined

Overcapacity in the steel industry, slowing global demand and falling coking coal prices have resulted in a decline in steel prices globally over the past one year. Domestic steel prices have also declined lately due to subdued demand; however, INR depreciation against the USD has partially muted the decline in steel prices.

Exhibit 9: Global steel prices have been declining

1000 900
(US$/tonne)

Exhibit 10: Domestic prices declined during 3QFY13

39,000 37,000 35,000

800
(`/tonne)

700 600 500 400

Dec-11 Dec-10 Dec-12 Jun-11 Jun-12 Aug-11 Aug-12 Apr-11 Apr-12 Oct-11 Feb-11 Feb-12 Oct-12

33,000 31,000 29,000 27,000 25,000

Sep-10

Sep-11

May-11

May-12

Sep-12

Jul-10

Jul-11

Jan-11

Jan-12

Jul-12

Mar-11

Nov-10

CIS HRC

USA HRC

Indian HRC price

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Steel imports on a rise

Steel imports have continued to rise over the past one year. Indian steel players continue to face threat of higher steel imports from FTA countries (which attract lower import duty). During April- December 2012, total steel imports by India have increased by 25.6% yoy to 6.0mn tonne.

February 21, 2013

Nov-11

Mar-12

Jan-13

Jan-13

Metals | Result review

Exhibit 11: Steel imports have risen over the past one year
7,000 6,000 900 800 700 600 500 400 300 200 100 0 (100)

(000 tonnes)

4,000 3,000 2,000 1,000 0

Dec-11

Aug-11

Aug-12

Net production

Real consumption

Net imports - RHS

Source: Bloomberg, Angel Research

Non-ferrous companies Outlook

Realizations to remain under pressure
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 during FY2015.

Exhibit 12: Despite decline in aluminium price...

6.0 5.0 4.0 3,200

Exhibit 13: ...production cuts are not visible yet

4.0 3.5

(mn tonnes)

(US$/tonne)

2,700 2,200 1,700 1,200

3.0 2.0 1.0 0.0

(mn tonnes)

3.0 2.5 2.0

Dec-08

Dec-11

Dec-07

Dec-09

Aug-07

Aug-09

Aug-10

Aug-08

Dec-10

Aug-11

Aug-12

Dec-12

Apr-08

Apr-11

Apr-07

Apr-10

Apr-12

Apr-09

Dec-09

Jun-07

Dec-12

Apr-11

Oct-11

Apr-12

Feb-11

Feb-12

Oct-12

Jun-11

Jun-12

Jan-07

Aug-06

Nov-07

Mar-11

Aug-11

Apr-08

Feb-09

Jan-12

Jun-12

LME aluminium inventories

LME aluminium price - RHS

Aluminium production - World

Aluminium consumption - World

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

February 21, 2013

May-10

Nov-12

Sep-08

Oct-10

Jul-09

(000 tonnes)

5,000

Metals | Result review

Exhibit 14: Aluminium production in China steady

2.0 1.8
(mn tonnes)

Exhibit 15: Bauxite imports of inputs have rise

7.0 6.0 5.0
(mn tonnes)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 (mn tonnes)

1.6 1.4 1.2 1.0

Feb-11 Sep-11 Feb-12 May-11 May-12 Dec-11 Aug-11 Mar-11 Nov-11 Mar-12 Aug-12 Sep-12 Jul-11 Jun-11 Apr-11 Jan-12 Oct-11 Apr-12 Jun-12 Jul-12 Oct-12 Nov-12

4.0 3.0 2.0 1.0 0.0

Aluminium production - China

Aluminium consumption - China

Bauxite imports - China

Alumina imports - China - (RHS)

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Exhibit 16: Zinc prices have been steady lately

1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 2,500 2,300

Exhibit 17: World production has picked up

1.2 1.2 1.1 1.1 1.0 1.0 0.9 0.9 0.8 0.8 0.7
Aug-08 Aug-09 Aug-10 Aug-11 Nov-08 Nov-09 Nov-10 Nov-11 Aug-12 May-08 May-09 May-10 May-11 May-12 Nov-12 Feb-09 Feb-10 Feb-11 Feb-12

(US$/tonne)

(mn tonnes)

2,100 1,900 1,700 1,500

Jan-12

Mar-11

Nov-11

Mar-12

May-11

May-12

Nov-12

Sep-11

Sep-12

Jan-13

Jul-11

Jul-12

(mn tonnes)

LME zinc inventories

LME zinc price- RHS

Zinc slab consumption - World

Zinc slab production - World

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

Exhibit 18: Chinese zinc production remains high...

550,000 500,000
(metric tonnes)

Exhibit 19: ...while imports have risen

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000

Dec-11 Jun-11 Aug-11 Jan-12 Jun-12 Mar-12 Nov-11 Aug-12 Apr-12 May-11 May-12 Nov-12 Oct-11 Sep-11 Feb-12 Sep-12 Oct-12 Jul-11 Jul-12

(metric tonne)

Feb-12

Sep-11

May-11

May-12

Sep-12

Jul-11

Jul-12

Dec-11

Aug-11

Mar-12

Aug-12

Nov-11

Zinc ores and concentrate production - China

China zinc imports

Source: Bloomberg, Angel Research

Source: Bloomberg, Angel Research

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

February 21, 2013

Nov-12

Dec-12

Jun-11

Jan-12

Apr-12

Jun-12

Oct-11

Oct-12

Metals | Result review

growth over the coming few years, low leverage levels and inexpensive valuations. Hence, our top picks are NMDC, Hindustan Zinc and Tata Steel.

Exhibit 20: One year stock price performance

10 5 0 (5) (10) (15) (20) (25) (30) (35)
Sterlite COAL NMDC Hindalco Tata Steel BSE Metal Index Nalco MOIL JSW Sesa SAIL HZL

Source: Bloomberg, Angel Research

Exhibit 21: Recommendation summary

Companies MOIL Nalco NMDC SAIL Sesa Sterlite Tata Steel Coal India Hindalco HZL JSW Steel CMP 250 46 147 76 164
98

Target 181 191

115

Reco. Neutral Neutral Buy Neutral

Buy Buy

Mcap Upside (` cr) 4,191 11,790 58,301 31,350 14,175

34,556

(%)

P/E (x) 9.7 21.6 9.2 11.6 5.5

6.0

P/BV (x) 9.6 1.5 1.0 2.0 0.8 0.8

0.6

EV/EBITDA (x) 1.4 1.0 1.7 0.7 0.7

0.6

RoE 16.7 4.6 23.6 6.6

16.3 11.3

RoCE (%) 15.1 6.9 23.0 8.2

15.4 11.2

(`) price (`)

(%) FY13E FY14E FY13E FY14E 23 16

17

FY13E FY14E FY13E FY14E FY13E FY14E 4.3 9.5 5.1 8.0
24.4 2.9

4.2 6.5 4.0 6.2

14.0 2.4

15.1 2.0 26.6 5.9

3.5 9.5

13.4 5.0 27.0 7.4

5.5 9.6

14.1 7.9 8.9 5.2

5.5

364 340 108 119 769

443 369 149 -

Buy Accum.
Neutral

35,604 213,493 20,596 50,386 17,336

22 9 25 -

50.7 13.2 8.0 8.1 9.3

10.5 12.4 7.8 7.3 8.5

0.8 4.1 0.6

1.6

0.8 3.3 0.6

1.3

7.4 8.5 7.2

4.6

5.5 7.2 6.2

3.2

1.6 35.0 7.9

21.1

7.5 29.3 7.6

19.8

5.7 19.9 5.5

17.7

9.7 18.8 5.8

17.7

Buy Neutral

1.0

0.9

5.2

4.6

10.7

10.7

9.6

10.4

Source: Company, Angel Research

February 21, 2013

Metals | Result review

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Analyst ownership of the stock Coal India Hindalco Hind. Zinc JSW Steel
MOIL

Angel and its Group companies ownership of the stock No No No No No No No No No No No

Angel and its Group companies' Directors ownership of the stock No No No No No No No No No No No

Broking relationship with company covered No No No No No No No No No No No

No No No No No No No No No No No

Nalco NMDC SAIL Sesa Goa Sterlite Inds Tata Steel

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 21, 2013