j~Åèì~êáÉ oÉëÉ~êÅÜ bèìáíáÉë India metals and mining Best placed in the region Rakesh Arora, CFA Macquarie Capital Securities (India) Pvt. Ltd. Level – 3, Mafatlal Center, Nariman Point Mumbai (India) 400021 June 2011 Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc., a registered broker - dealer and member of The Financial Industry Regulatory Authority (“FINRA”). All transactions by U.S. investors involving securities discussed in this report must be effected through Macquarie Capital (USA) Inc., which assumes responsibility in the U.S. for the contents of this report. This research report has been prepared in whole or part by foreign research analysts. These research analysts are not registered/qualified as a research analyst with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a foreign jurisdiction that have been recognized for these purposes by FINRA. Please read Disclaimer on Page 44-46
47
Embed
j~Åèì~êáÉ=oÉëÉ~êÅÜ bèìáíáÉë › dafiles › Internet › mgl › msg › i...j~Åèì~êáÉ=oÉëÉ~êÅÜ bèìáíáÉë India metals and mining Best placed in
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
j~Åèì~êáÉ=oÉëÉ~êÅÜbèìáíáÉë
India metals and miningBest placed in the region
Rakesh Arora, CFAMacquarie Capital Securities (India) Pvt. Ltd.
Level – 3, Mafatlal Center, Nariman PointMumbai (India) 400021
June 2011
Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc., a registered broker - dealer and member of The Financial Industry Regulatory Authority (“FINRA”). All transactions by U.S. investors involving securities discussed in this report must be effected through Macquarie Capital (USA) Inc., which assumes responsibility in the U.S. for the contents of this report.
This research report has been prepared in whole or part by foreign research analysts. These research analysts are not registered/qualified as a research analyst with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a foreign jurisdiction that have been recognized for these purposes by FINRA.
Please read Disclaimer on Page 44-46
Page 2
Export/GDP - India is a domestic story
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
Singapore
HK
Malaysia
Taiw an
Phillipines
Korea
Indonesia
India
Export/GDP
Why India? Supply-constrained and low costNew supply is coming online: Although India was a net importer of steel, this can change with JSW, Tata and Essar’s new capacity coming online. India will remain a net importer of coal and power deficit at 14.5%.Demand growing – though can’t outpace supply: GDP forecast at 8.5%. Cement demand grew at 7%, and steel demand grew at 6% YTD.Lowest-cost producers: Integrated nature of companies, nearer to market and low labour cost advantage.Free – resources: The Indian government is allocating resources free of cost to whoever is willing to put up employment-generating finishing lines. 20billion t of thermal coal reserves allocated.
Source: CEIC, Macquarie Research, May 2011
GDP growth - India to have more stable growth
-4.0
0.0
4.0
8.0
12.0
16.0
2006 2007 2008 2009 2010 2011E 2012E
India China Korea Malaysia Phillipines
`
Forecast
Page 3
Policy changes to empower growthChanging regulation and policies: Lots of changes proposed with upcoming new mining policy.
Streamlining the process, reducing time taken to allocate
Auction/bidding of ore bodies delineated by government agencies
Controversial change of sharing 26% of mine profits
Linking royalty rates to market prices
Haves and have nots: Most companies are facing intense competition getting resources.This has created a significant divergence in profitability of growth. Most companies have also faced issues with land acquisition, environmental clearances, etc.
Key winners here will likely be companies that already have large resources and that should gain in value once auctioning of government explored mineral deposits starts, as per the new policy.
Page 4
Themes we play onRelatively safe, sound and growing domestic plays: Jindal Steel & Power, Sterlite and Gujarat NRE Coke
Turning around operations: JSW Steel
Costly and we think best avoided: Nalco Based on FY3/12 estimates.
Source: Macquarie Research, May 2011
Valuation Summary on FY3/12PER EV/EBITDA P/BV Debt/Equity ROE
Steel – high iron ore prices add to competitive advantage
Demand weak but seems to be stabilizing: Demand was hit by liquidity tightening but now seems to be stabilizing, albeit at a slower pace. Indian steel prices have stabilized post a decline in April and are now at a discount to import parity price.
New supply coming online: However, the Indian steel industry is likely to witness almost 10mnt of capacity addition and slower demand this year, but still should be able to operate at full capacity as gross imports stand at 7–8mnt, which can be substituted.
Raw material advantage: Most companies have captive iron ore that costs US$20–25/t against US$150–160/t CIF China. Advantage of US$180/t of steel.
Key Ideas: Jindal Steel and Power (JSP IN, Rs656, OP, TP: Rs938) and JSW Steel (JSTL IN, Rs965, OP, TP: Rs1,229). We like JSP and JSW Steel, for which our earnings estimates are well above consensus. Tata Steel is a leveraged play on the steel cycle, while SAIL lacks a positive catalyst in the near term and we think can be avoided currently.
Page 8
High demand has led to increasing imports
Source: Company data, Macquarie Research, May 2011
Finished steel imports
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
19911992
19931994
1995
19961997
19981999
20002001
20022003
20042005
2006
20072008
20092010
('000 tonnes)
Capacity additions (FY11 - FY16) - Greenfield capacities in doubt
0
1
2
3
4
5
67
8
9
10
Tata
Ste
el
SA
IL
Ispa
t
JSW
Ste
el
Ess
ar
JSP
L
RIN
L
Bhu
shan
Pos
co
Mitt
al
NM
DC
Oth
ers
EA
F/IF
(mtpa)
Brownfield Greenfield
Steel capacity is not increasing fast enough, with greenfield
capacities remaining in doubt.
India will remain a net importer.
0
10
20
30
40
50
60
70
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
App
aren
t fin
ishe
d st
eel c
onsu
mpt
ion
(MnT
)
Average GDP growth at 7.5%, Apparent steel consumption grew at CAGR of 9.3%
Expected GDP growth at 8.5% and steel consumption growth at 2%
Page 9
Indian steel – offers best selling price5% import duty – gives extra US$25–30/t in realisation and restriction on imports due to hassles inimporting hot rolled coil.
Premium due to domestic shortages – Indian steel prices at 10-15% premium, though have been at a discount lately.
Source: JPC, Macquarie Research, May 2011
This, in addition to lowest cost advantage, has helped profitability
JSW Steel – a turnaround storyExpanding Indian operations, bought Ispat recently Will likely reap synergy benefits despite low raw material integration
JFE deal helped reduce leverage Costs remain a concern with lack of raw material integration
Source: Company data, Macquarie Research, May 2011
JSW Steel - Expansion drive
7 7 710 10
1 1 1
1 13
3 4
3
3
0
5
10
15
20
25
Current FY10E FY11E FY12E Long term
mtpa
Vijaynagar SISCOL Ispat West Bengal Jharkhand
Raw material integration
0%
22%
16%
11%10%
21%17%
0% 0% 0%
12%
5%
-5%
0%
5%
10%
15%
20%
25%
F Y2008 F Y2009 F Y2010 F Y2011 F Y2012 F Y2013
Iro n o re C o king co al
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
FY2010 FY2011E FY2012E FY2013E
Net debt to equity JSW Steel - cost breakup movement
Aluminium – the key base metal in India: India currently has capacity of 1.5mt, and the capacity is being increased to 3mt by FY15 by players like Hindalco. The biggest concern is allocation of bauxite and coal mines, which are in the interior of India. Aluminium seems to be peaking out, and we remain cautious to the possibility of unwinding of inventory as interest rate cycle reverses. Hindalco, with 65% of earnings coming from the rolling business, remains our hedged play on aluminium.
Copper – lack of concentrate: India continues to import concentrate due to a lack of availability.
Zinc – low cost expansions: India is one of the lowest cost producers of zinc, and capacity expansion by Hindustan Zinc has increased capacity from 600kt to 850kt. We think zinc prices have corrected quite a bit and are near the marginal cost of production.
Key ideas: Sterlite (STLT IN, Rs173, OP, TP: Rs234). Our preferred play on zinc is Sterlite, which has other catalysts too.
Page 27
Sterlite Industries (STLT IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
50
100
150
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
Sterlite India Sensex
Sterlite Industries STLT INRecommendation OutperformTarget price (Rs) 234 Current price (Rs) 173 % upside (downside) 35%Market cap (Rsm) 581,557 Market cap (US$m) 12,923
Nalco NACL INRecommendation UnderperformTarget price (Rs) 72 Current price (Rs) 92 % upside (downside) -22%Market cap (Rsm) 237,106 Market cap (US$m) 5,269
Page 34
Nalco – looking expensive and no triggersExtremely expensive: Trading at a 20x PER on FY11E. Even on P/B, we think it is difficult to justify 2x given the single-digit return on equity.
Capacity enhancement at wrong time: Capacity increasing by 30%, when aluminium prices are near cost of production.
Future expansions are prohibitively expensive: Nalco’s future smelters and refineries are coming up at almost double the cost of its Indian competitors.
Source: Bloomberg, Macquarie Research, May 2011
Page 35
Coking coal – Lack of resources
Steel production growth to drive demand: India’s steel demand is expected to grow by more than 10% in the next few years, and the coking coal requirement will increase from 25mt currently to 45mt by FY13E.
Supply shortfall: Domestic supply is not increasing in line, resulting in a shortfall of close to 30-35mt, which will have to be sourced from imports.
Global prices to remain strong: The $300/t FOB Australia settlement represents a premium over cost support and short supply due to floods in Australia. This also is reflecting the goodwill toward coking coal and the ‘supply risk’ premium. We expect prices to remain strong as global steel production recovers.
Gujarat NRE Coke – story of backward integrationIndia’s largest independent LAM coke producer: GNC is India’s largest non-captive producer of low-ash metallurgical coke with a total capacity of 1mtpa.
Backward integration: To escape the volatility of processing margins, the company acquired coking coal mines (only raw material) in NSW, Australia.
Reserves of ~650mt: The mines contain nearly 650mt of primary hard coking coal, which are still in scarcity and whose prices went up more than three times last year.
Source: Company data, Macquarie Research, May 2011
Indian Operations FY09A FY10A FY11E FY12E FY13 FY14 FY15Indian Operations
Coal India COAL INRecommendation NeutralTarget price (Rs) 382 Current price (Rs) 415 % upside (downside) -8%Market cap (Rsm) 2,621,291 Market cap (US$m) 58,251
Page 39
Coal India – Igniting India with CoalCoal India Limited (CIL) is the world’s largest coal company and India’s largest corporate employer, with nearly 400k employees. It has total coal resources of over 65bn tonnes. It has been producing at a CAGR of 5.5% for the past decade and is expected to fuel India with 454mt of coal in FY12.While we like the assets of Coal India, we are maintaining our Neutral rating. There could be downside risk to earnings if Coal India is not allowed to increase prices in view of rising inflation.CIL management has been very categorical in maintaining that it will increase prices only to maintain margins. The recent price increase was to prepare for the upcoming cost increase due to the upcoming 5yr wage agreement. So any expectations for a coal price hike for the next 12-15 months looks very optimistic. We are building in US$8.3/t and a 31% margin, and we are slightly lower than consensus.CIL is now holding 70mnt of inventory, which is well above the 45mnt on normalised basis. Every 10mnt increase in sales is a small 2.5% increase in profits. We seriously doubt Indian railways’ ability to provide more rakes to lift coal, as they already have to increase rakes for the increase in production projected for FY12. In a worst-case scenario, some of this coal can catch fire and could be lost, as post monsoon, moisture trapped in the coal heaps acts as catalyst for ignition when the sun heats it up.
Source: Company data, Macquarie Research, May 2011
Page 40
Production and despatch numbers will continue to increase
Source: Company data, Macquarie Research, May 2011
And increase in realisations should help increase margins
Reserves of 22bn tonnes. India produces close to 220m tonnes per year, and about 50% of iron ore production is exported annually from India, with China being the biggest consumer.
Exports have been weak but will recover: Exports have been low due to monsoons as well as the ban imposed by Karnataka on transport of ore for exports. However, as a resolution is reached between iron ore exporters and the government, we expect exports will recover.
Medium term: We remain positive on iron ore as we believe steel production will remain strong and demand for iron ore will see growth.
Key Idea: NMDC (NMDC IN, Rs270, OP, TP: Rs289)
Page 42
NMDC (NMDC IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
NMDC vs Sensex
-
50
100
150
200
250
300
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
NMDC India Sensex
cc
NMDC NMDC INRecommendation OutperformTarget price (Rs) 289 Current price (Rs) 270 % upside (downside) 7%Market cap (Rsm) 1,070,469 Market cap (US$m) 23,788
EPS = adjusted net profit /efpowa*ROA = adjusted ebit / average total assetsROA Banks/Insurance = adjusted net profit /average total assetsROE = adjusted net profit / average shareholders fundsGross cashflow = adjusted net profit + depreciation*equivalent fully paid ordinary weighted average number of shares
All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Volatility index definition*This is calculated from the volatility of historic price movements.
Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.
High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.
Medium – stock should be expected to move up or down at least 30-40% in a year.
Low–medium – stock should be expected to move up or down at least 25-30% in a year.
Low – stock should be expected to move up or down at least 15-25% in a year.
* Applicable to Australian/NZ stocks only
Recommendation – 12 months
Note: Quant recommendations may differ from Fundamental Analyst recommendations
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark returnNeutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe
Outperform – expected return >+10%Neutral – expected return from -10% to +10%Underperform – expected <-10%
Macquarie First South - South Africa
Outperform – return > 10% in excess of benchmark returnNeutral – return within 10% of benchmark returnUnderperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Recommendation proportions – For quarter ending 31 March 2011
13.11%35.73%51.16%
EUR
(for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)(for US coverage by MCUSA, 17.55% of stocks covered are investment banking clients)(for US coverage by MCUSA, 14.36% of stocks covered are investment banking clients)
Company Specific Disclosures:Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSL No. 318062) (MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
General Disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; and Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FSA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise.
Country-Specific Disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organisation of the Australian Securities Exchange. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and sent to US persons. Any person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. The Research Distribution Policy of Macquarie