1. Sector Review | Metal
August 16, 2010
Metal sector – Mixed bag
Paresh Jain
Tel: 022-40403800 Ext: 348
pareshn.jain@angeltrade.com
Post 1QFY2011 results, we analysed the change in consensus estimates for the
Pooja Jain
metal sector and observed that: a) Hindalco is the only company to have
Tel: 022-40403800 Ext: 311
witnessed upgrades for FY2011E and FY2012E, b) Hindustan Zinc (HZL), SAIL pooja.j@angeltrade.com
and Sterlite’s estimates have been downgraded the most, c) margin pressure has
resulted in downward revision of EBITDA for JSW Steel, d) estimates for Sesa Goa
are at risk on account of lower volumes and consensus may downgrade them,
and e) Tata Steel’s estimates have not been changed much despite weak
1QFY2011 results, implying that the consensus is already conservative.
Hindalco - The only company to witness successive upgrades: Consensus has
upgraded Hindalco’s net revenue, EBITDA and net income estimates (since May
2010) by 1.6%/2.6%/7.9% and 0.3%/2.8%/1.0% for FY2011E and FY2012E,
respectively. However, our estimates are further ahead of the street by 5.7% for
EBITDA and 20.2% for net income for FY2011E. In 1QFY2011, the company
achieved 24.0%/29.4% of consensus FY2011E EBITDA and net income estimates,
implying scope for further upside to consensus estimates.
Ferrous pack downgrade led by SAIL, consensus building in margin pressure in
JSW Steel: Consensus estimates for SAIL’s net revenue, EBITDA and net income
have been downgraded the most (since May 2010) by 2.8%/10.1%/11.8% and
2.5%/8.4%/8.2% for FY2011E and FY2012E, respectively. JSW, which witnessed
a successive increase in estimates from July 2009–May 2010, has witnessed a
6.2%/5.4% downward revision in FY2011E EBITDA and net income estimates.
EBITDA margin for FY2011E and FY2012E has been revised downwards (since
June 2009) by 450bp and 480bp, respectively.
Tata Steel estimates remain largely unchanged for FY2011E: Tata Steel, despite
weaker-than-expected 1QFY2011E results, is yet to witness any meaningful
downgrade. We believe the consensus has already built in conservative estimates
for Tata Steel.
Earnings downgrade for Sesa Goa likely: Earnings risk is higher as the consensus,
including us, is yet to factor in any shortfall in volumes as compared to the
management’s guidance. 1QFY2011 iron ore sales volume ex-Dempo was lower
11.7% yoy. Also, the impact of the ban on iron ore sales from Karnataka is yet to
be factored into the estimates.
Sterlite and HZL downgraded; we continue to be below street estimates:
Consensus has downgraded (since May 2010) Sterlite’s and HZL’s FY2011E
estimates for net revenue, EBITDA and net profit by 6.7%/11.3%/14.4% and
8.0%/13.6%/11.5%, respectively. Our FY2011E estimates for Sterlite and HZL are
still lower by 4.1%/8.3%/7.2% and 6.5%/8.7%/9/6%, respectively.
1QFY2011E results disappoint, Hindalco in line with estimates: During
1QFY2011E, ferrous companies’ results were disappointing as sales volumes
were below expectations on account of higher imports. While HZL’s results were
disappointing as the company’s OPM declined due to higher mining costs, other
non-ferrous companies benefited from increased by-product realisations.
Our top picks are Tata Steel (ferrous pack) and Hindalco (non-ferrous pack).
Please refer to important disclosures at the end of this report 1
2. Sector Review | Metal
Exhibit 1: Change in consensus estimates for FY2011E
% change from July 2009 % change from May 2010
Net Revenue EBITDA Net income EBITDA margin EPS Net Revenue EBITDA Net income EBITDA margin EPS
JSW Steel 20.1 (0.7) 7.0 (450bp) (4.7) (0.6) (6.2) (5.4) (130bp) (14.0)
Tata Steel 1.4 (5.0) (2.0) (90bp) (7.7) (1.3) (0.7) 1.9 10bp 0.2
Sail 4.6 (7.1) 2.0 (290bp) 5.0 (2.8) (10.1) (11.8) (190bp) (10.9)
Sesa Goa 51.0 74.0 93.2 740bp 75.0 (0.5) (0.3) 2.9 10bp 1.6
Sterlite 21.1 15.1 9.0 (150bp) 6.1 (6.7) (11.3) (14.4) (150bp) (7.5)
Hindalco 17.4 43.7 148.7 220bp 119.6 1.6 2.6 7.9 10bp 6.4
Hindustan Zinc 26.3 29.7 33.1 150bp 34.5 (8.0) (13.6) (11.5) (370bp) (10.8)
Nalco 8.4 5.3 7.7 (90bp) 7.5 (2.1) (4.7) (4.8) (90bp) (4.8)
Source: Bloomberg, Angel Research
Exhibit 2: Change in consensus estimates for FY2012E
% change from July 2009 % change from May 2010
Net Revenue EBITDA Net income EBITDA margin EPS Net Revenue EBITDA Net income EBITDA margin EPS
JSW Steel 29.8 6.9 12.3 (480bp) (5.8) (0.9) (2.9) (1.8) (50bp) (15.6)
Tata Steel 3.6 (1.4) (8.9) (70bp) (12.5) (3.1) (3.1) (2.6) 0bp (4.1)
Sail 1.2 (12.2) (6.2) (390bp) (7.0) (2.5) (8.4) (8.2) (160bp) (7.8)
Sesa Goa 64.3 128.7 159.3 1530bp 113.3 (0.9) (1.8) (0.8) (50bp) (1.4)
Sterlite 28.3 18.5 25.7 (270bp) 18.1 (1.2) (4.9) (7.8) (130bp (5.0)
Hindalco 15.0 44.5 103.2 260bp 81.1 0.3 2.8 1.0 30bp 0.4
Hindustan Zinc 27.1 20.2 32.6 (340bp) 33.9 (5.6) (11.5) (9.1) (390bp) (8.9)
Nalco 5.1 (2.8) 8.1 (280bp) 10.6 (0.2) (1.9) (2.0) (60bp) (1.7)
Source: Bloomberg, Angel Research
Exhibit 3: 1QFY11 performance v/s Consensus and Angel FY2011E estimates
Net revenue EBITDA Net income
% of Consensus % of Angel % of Consensus % of Angel % of Consensus % of Angel
(Rs cr) 1QFY11A 1QFY11A 1QFY11A
est. (FY11E) est. (FY11E) est. (FY11E) est. (FY11E) est. (FY11E) est. (FY11E)
JSW Steel 4,779 19.6 19.8 1,134 21.6 20.1 332 17.6 16.8
Tata Steel 27,195 24.6 23.5 4,433 29.4 27.7 1,825 31.8 28.2
Sail 9,029 19.6 19.1 1,843 17.1 18.9 1,177 16.9 18.8
Sesa Goa 2,413 25.7 24.8 1,460 27.5 27.5 1,302 29.7 28.5
Sterlite 5,925 20.6 21.5 1,452 17.0 18.6 1,008 19.5 21.0
Hindalco 16,706 25.9 26.2 1,878 24.0 22.7 886 29.4 24.4
Hindustan Zinc 1,951 21.4 22.9 1,022 19.5 21.3 891 19.8 21.9
Nalco 1,292 22.2 22.8 394 21.3 24.5 284 22.7 27.9
Source: Bloomberg, Angel Research
August 16, 2010 2
