edited q3fy20 metals previewvid.investmentguruindia.com/report/2020/january/q3fy20_metals_p… ·...

Please refer to important disclosures at the end of this report

Equity Research January 8, 2020 BSE Sensex: 40869

ICICI Securities Limited is the author and distributor of this report

Q3FY20 results preview

Metals

An inconsequential quarter

Research Analysts:

Abhijit Mitra [email protected] +91 22 6637 7289 Rohan Jain [email protected] +91 22 6637 7510

Q3FY20 witnessed weak steel prices accentuated by renegotiated auto contracts(we expect offtake by the auto industry to meaningfully increase in Q4). EBITDAfor the ferrous players is likely to decline 16-75% YoY, despite significant uptick involumes across the board. Non-ferrous players fared better mainly due tomoderating power costs. Volume performance in Vedanta continues to disappointacross zinc and oil&gas sectors, which mutes QoQ EBITDA improvement despiteimprovement in aluminium manufacturing costs. Hindalco copper operationsremained muted, thereby impeding significant QoQ EBITDA improvement. Murirestart will help stabilise aluminium operations by Q4FY20. NMDC witnessed 3%YoY decline in volumes despite a weak base, impacted by Donimalai closure.Maintain BUY on Tata Steel, JSPL, NMDC and Hindustan Zinc.

Q3FY20 witnessed significant pricing weakness in ferrous pack. Most players inthe ferrous segment had already guided for Rs2,500-3,500/te QoQ pricing decline inreported realisations. Spot prices have increased since Nov’19, but will reverse inQ4FY20, making Q3FY20’s realisation uptrend nearly inconsequential. Driven byrestocking and continued buoyancy in exports, significant volume increases YoYwere witnessed in JSPL and Tata Steel.

Subdued zinc and oil&gas operations continue to drag Vedanta. Oil&gasvolumes refuse to increase while higher discounts to Brent meaningfully impactedsectoral EBITDA (down 14% QoQ). Improvement in Gamsberg production did notlead to improvement in overall production while Zinc India production failed to rampup yet again – making it difficult for the company to maintain Q4FY20 volumeguidance. Thus, despite lower aluminium costs, QoQ EBITDA performance fails toimpress.

Copper earnings continue to drag Hindalco’s EBITDA. Copper EBITDA is stuck ina multi-quarter low range of Rs2.5bn due to continued weak volume performances,weak TcRc as well as subdued product realisations. Aluminium operations has scopeto surprise on the back of lower power cost. Novelis is expected to witness anEBITDA decline of 11% QoQ leading to EBITDA/te of US$400/te.

NMDC (BUY) witnessed 3% YoY drop in volumes. We estimate EBITDA/te todecline 7% QoQ and 32% YoY. However, the EBITDA trajectory is again set toimprove QoQ driven by price increase as uncertainty around mining auctions start torestocking led price increases.

Top picks. Maintain Tata Steel and JSPL as our top picks in the sector.

Quarterly estimates

(Rs mn)

Net Sales EBITDA PAT

OND’19* % chg OND’19* % chg OND’19* % chg

(YoY) (QoQ) (YoY) (QoQ) (YoY) (QoQ)

Tata Steel 356,110 (8.3) 3.0 38,576 (42.6) 1.0 482 (97.3) (98.8) JSW Steel 175,508 (13.6) 2.6 23,407 (48.0) 3.3 2,385 (85.3) 118.8 JSPL 85,354 (10.8) (4.5) 16,470 (20.7) 0.3 (3,338) NA NA Vedanta 230,399 (3) 4.9 46,828 (17) 5.9 7,207 (54) (72) Hindustan Zinc 46,216 (16.6) 2.5 21,266 (25.1) 0.5 16,166 (26.9) (22.3) Hindalco # 91,891 (23.1) (7.8) 7,816 (15.8) (1.3) 627 (74.7) (19.7) NMDC 29,721 (18.6) 32.6 14,313 (33.6) 35.0 9,425 (40.2) 34.0 Total 1,015,199 (10.6) 2.2 168,676 (32.1) 4.6 32,954 (63.3) (64.5)

OND: Oct-Dec 2019; # standalone

INDIA

Metals ICICI Securities

2

Table 1: I-Sec estimates vis-à-vis consensus

(Rs mn) Sales EBITDA

FY20E FY21E FY20E FY21E Tata Steel I-Sec estimates 1,556,522 1,668,646 219,061 267,612 Consensus estimates 1,512,000 1,572,000 204,331 241,230 Variation (%) 2.9 6.1 7.2 10.9 JSW Steel I-Sec estimates 795,292 878,996 142,266 177,968 Consensus estimates 760,205 864,331 130,903 167,465 Variation (%) 4.6 1.7 8.7 6.3 JSPL I-Sec estimates 401,040 429,944 85,689 90,243 Consensus estimates 396,964 428,634 78,790 90,354 Variation (%) 1.0 0.3 8.8 (0.1) Vedanta I-Sec estimates 965,655 1,442,121 241,473 313,730 Consensus estimates 892,063 974,579 220,323 253,969 Variation (%) 8.2 48.0 9.6 23.5 Hindustan Zinc I-Sec estimates 207,013 236,019 108,988 130,225 Consensus estimates 215,997 234,936 108,286 118,685 Variation (%) (4.2) 0.5 0.6 9.7 Hindalco I-Sec estimates 1,430,694 1,436,359 150,848 151,861 Consensus estimates 1,248,000 1,321,000 144,347 150,451 Variation (%) 14.6 8.7 4.5 0.9 NMDC I-Sec estimates 108,762 119,430 48,644 56,548 Consensus estimates 116,004 134,358 60,203 65,721 Variation (%) (6.2) (11.1) (19.2) (14.0)

Source: Bloomberg, I-Sec research

Table 2: Ferrous pack – Volumes, realisations and margins Q3FY20E Q3FY19 % chg YoY Q2FY20 % chg QoQ Sales volume (mnte) Tata Steel (standalone) 3.30 2.97 11.1 2.97 11.2 Tata Steel Europe 2.30 2.35 (2.1) 2.29 0.4 JSPL (standalone) 1.55 1.20 29.2 1.33 16.5 JSW Steel (standalone) 3.90 3.68 6.0 3.60 8.3 NMDC 8.44 8.70 (3.0) 5.82 45.1 Realisation (Rs/te) Tata Steel standalone 45,781 56,199 (18.5) 48,809 (6.2) Tata Steel Europe (US$/te) 851 936 (9.0) 871 (2.3) JSPL (standalone) 41,599 53,038 (21.6) 46,330 (10.2) JSW Steel (standalone) 38,778 48,769 (20.5) 40,978 (5.4) NMDC 3,480 4,157 (16.3) 3,780 (7.9) Margin (Rs/te) Tata Steel standalone* 10,348 15,318 (32.4) 11,719 (11.7) Tata Steel Europe (US$/te) (5) 56 (108.2) 10 (144.5) JSPL (standalone) 8,005 12,334 (35.1) 9,437 (15.2) JSW Steel (standalone) 5,390 10,848 (50.3) 5,633 (4.3) NMDC 1,696 2,475 (31.5) 1,823 (7.0)

Source: Company data, I-Sec research *Ex Bhushan


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Tata Steel (BUY) (QoQ chg: 46.4%; YoY chg: -2.0%)

Standalone (Rs mn, year ending March 31) Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Gross Sales less Excise 1,54,078 1,71,739 (10.3) 1,48,712 3.6 Other Operating Income 3,000 4,827 (37.8) 3,846 (22.0) Expenses Total Expenditure 1,19,930 1,26,245 (5.0) 1,13,930 5.3 EBITDA 34,148 45,494 (24.9) 34,782 (1.8) Margin (%) 22.2 26.5 23.4 Other Income 1,035 5,860 (82.3) 1,035 - Interest 7,200 6,820 5.6 7,200 - Depreciation 9,703 9,397 3.3 9,703 - Operational PBT 18,279 35,136 (48.0) 18,914 (3.4) Extraordinary Exp. - 2,597 (26) Rep. PBT 18,279 37,733 (51.6) 18,888 (3.2) Tax - 13,172 (19,490) PAT 13,673 24,561 (44.3) 38,378 (64.4) Adj. PAT 13,673 21,964 (37.7) 38,404 (64.4) Source: Company data, I-Sec research

Consolidated (Rs mn, year ending March 31)

Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net Sales 356,110 388,539 (8.3) 345,792 3.0 Expenses EBITDA 38,576 67,158 (42.6) 38,196 1.0 Margins (%) 10.8 17.3 11.0 Other Income 2,000 2,174 (8.0) 1,836 9.0 Interest 18,500 19,260 (3.9) 18,714 (1.1) Depreciation 21,272 18,662 14.0 21,272 - Operational PBT 804 31,409 46 Extra ordinary - 324 - (336) PBT 804 31,733 (290) Tax 322 14,067 (40,500) PAT 482 17,667 40,210 Adj. PAT 482 17,343 40,546 Minority Interest 1,013 5,175 1,013 Share of Associates 224 500 224 Adjusted PAT post MI/share of associate 1,719 23,666 41,112 Reported PAT post MI/share of associate 1,719 23,342 41,447 Source: Company data, I-Sec research

Tata Steel’s standalone EBITDA is expected to decrease by 1.8% QoQ as realisation/te seems is likely to decline by >Rs3,000/te.

Tata Steel Europe’s volumes are expected to be stable QoQ at 2.3mnte.

Tata Steel Europe’s EBITDA seems set to decline further QoQ, with weaker Q3FY20 realisations.

We expect Bhushan Steel’s EBITDA to be stable QoQ on increasing volumes compensated by falling realisations.

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JSW Steel (HOLD) (QoQ chg: 27.5%; YoY chg: 13.5%)

Standalone (Rs mn, year ending March 31)

Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net Sales 1,54,253 1,83,930 (16.1) 1,50,540 2.5 Raw Material Consumed 85,009 1,05,900 (19.7) 83,570 1.7 Stock Adjustment (200) (13,550) (60) Employee Expenses 3,300 3,610 (8.6) 3,300 - Power, Oil & Fuel 14,104 15,180 (7.1) 13,540 4.2 Other Expenses 28,000 28,410 (1.4) 26,890 4.1 Total Expenditure 1,30,213 1,39,550 (6.7) 1,27,240 2.3 EBITDA 24,040 44,380 (45.8) 23,300 3.2 Margin % 15.6 24.1 15.5 Other Income 1,000 670 49.3 1,880 (46.8) Miscellaneous Income (Exp) - - - Interest 10,500 9,570 9.7 10,750 (2.3) EBIT 14,540 35,480 14,430 0.8 Depreciation 8,700 8,550 1.8 8,740 (0.5) Extra-ordinary Items - - (4,660) PBT (reported) 5,840 26,930 10,350 PBT (recurring) 5,840 26,930 1,030 Tax (reported) 1,472 5,780 700 Tax (recurring) 1,472 8,079 258 Reported PAT 4,368 18,920 29,170 Adjusted PAT 4,368 18,851 773 Sales volume (mnte) 3.90 3.68 6.0 3.60 8.3 Raw Material cost (Rs/te) 21,797 25,095 (13.1) 23,197 (6.0) Power cost (Rs/te) 3,526 3,589 (1.7) 3,526 - Blended Cost (Rs/te) 33,388 37,921 (12.0) 35,344 (5.5) EBITDA/te (US$) (Adjusted) 76 151 (49.8) 80 (5.7)

Source: Company data, I-Sec research


Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net Sales 1,75,508 2,03,180 (13.6) 1,71,060 2.6 Total expenditure 1,52,101 1,58,170 (3.8) 1,48,410 2.5 EBITDA 23,407 45,010 (48.0) 22,650 3.3 Margin % 13.3 22.2 13.2 Other Income 1,000 370 170.3 1,560 (35.9) Interest 11,000 10,210 7.7 11,270 (2.4) PBDT 13,407 35,170 (61.9) 12,940 3.6 Depreciation 10,000 10,780 (7.2) 10,570 (5.4) PBT (recurring) 3,407 24,390 (86.0) 2,370 43.8 PBT (reported) 3,407 24,390 (86.0) 7,030 (51.5) Tax (recurring) 1,022 8,200 (87.5) 1,280 (20.1) Tax (reported) 1,022 8,200 (87.5) (18,480) Reported PAT 2,385 16,190 (85.3) 25,510 (90.7) Adj. Net Profit after MI and associate 2,525 16,030 (84.2) 25,360 (90.0)


Volumes are expected to be stable increase QoQ to 3.9mnte in Q3FY20. Realisations are estimated to decline 5.4% QoQ. This leads to 3.2% increase in standalone EBITDA.

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Jindal Steel & Power (BUY) (QoQ chg: 79.3%; YoY chg: 9.9%)

Standalone Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net sales 68,844 67,183 2.5 65,985 4.3 Other operating income - 913 - Total sales 68,844 67,309 2.3 65,729 4.7 Change in stock - (1,979) NA (1,654) NA Consumption of raw materials 34,332 29,563 16.1 30,106 14.0 Purchase of traded goods 2,000 3,264 (38.7) 2,602 (23.1) Employee costs 1,650 1,693 (2.6) 1,625 1.5 Other expenditure 6,975 20,754 (66.4) 15,140 (53.9) Total costs 56,436 52,508 7.5 53,179 6.1 EBITDA 12,408 14,801 (16.2) 12,551 (1.1) Margin (%) 18.0 22.0 19.1 Depreciation 5,800 5,722 1.4 5,823 (0.4) EBIT 6,608 9,080 6,728 (1.8) Interest expense 6,450 6,351 1.6 6,569 (1.8) Other income - 145 - Extraordinary / Forex (gain)/Loss - - - PBT (recurring) 158 2,873 159 PBT (reported) 158 2,873 159 Tax (recurring) 0 1,107 8 Tax (reported) 0 1,107 8 PAT (recurring) 157 1,766 151 PAT (reported) 157 1,766 151


Consolidated

Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg

QoQ Net sales 85,354 95,137 (10.3) 89,651 (4.8) Other operating income - 1,306 (100.0) - Total sales 85,354 95,656 (10.8) 89,395 (4.5) Change in stock - (3,714) NA 2,924 Consumption of raw materials 41,464 38,560 7.5 37,212 11.4 Purchase of traded goods 1,000 2,766 (63.8) (3,624) (127.6) Employee costs 2,800 2,795 0.2 2,636 6.2 Other expenditure 9,884 21,076 (53.1) 23,337 (57.6) Total costs 68,884 74,887 (8.0) 72,980 (5.6) EBITDA 16,470 20,769 (20.7) 16,415 0.3 Margin (%) 19.3 21.7 18.4 Depreciation 10,500 10,357 1.4 10,390 1.1 EBIT 5,970 10,412 6,026 Interest expense 10,000 10,424 (4.1) 10,301 (2.9) Other income 60 148 8 Extraordinary / Forex (gain)/Loss - - - PBT (recurring) (3,970) 136 NA (4,267) NA PBT (reported) (3,970) 136 NA (4,267) NA Tax (recurring) (675) 1,008 NA (273) Tax (reported) (675) 1,008 NA (273) PAT (recurring) (3,295) (872) NA (3,993) NA PAT (reported) (3,295) (872) NA (3,993) NA Minority interest (43) 632 988 Share of associates - - - PAT after minority (recurring) (3,338) (240) NA (3,005) PAT after minority (reported) (3,338) (240) NA (3,005)


We forecast volumes to increase 16.5% QoQ and EBITDA/te to be down 15.2% QoQ at Rs8,005 leading to a stable QoQ standalone EBITDA. Jindal Power’s EBITDA is likely to decrease QoQ due to lower realisation.

Oman spreads are likely to expand QoQ to US$74/te with volumes estimated at 0.4mnte leading to an EBITDA of US$30mn.

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Vedanta (HOLD) (QoQ chg: 9.4%; YoY chg: -19.4%)

Consolidated (Rs mn, year ending March 31) Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net sales 230,399 236,690 (2.7) 219,580 4.9 Total expenditure 183,571 180,240 1.8 175,350 4.7 EBITDA 46,828 56,450 (17.0) 44,230 5.9

Cairn India 15,575 19,730 (21.1) 18,170 (14.3) Zinc India 21,029 28,390 (25.9) 20,660 1.8 Zinc International 2,023 2,060 (1.8) 2,070 (2.3) Power business 2,955 3,640 (18.8) 4,190 (29.5) Aluminium business 2,624 (940) (1,140) Copper (690) (750) (1,050) Iron Ore 1,913 1,010 89.4 2,010 (4.8) Steel 1,400 2,490 (43.8) 180 677.8 Others - 820 -

Other income 6,500 13,980 (53.5) 8,560 (24.1) Interest 13,000 13,580 (4.3) 13,400 (3.0) PBDT 40,328 56,850 (29.1) 39,390 2.4 Depreciation 23,500 22,070 6.5 23,950 (1.9) Extraordinary expenses - - 4,220 PBT 16,828 34,780 (51.6) 11,220 50.0 Tax 5,049 11,460 (16,090) Reported profit after tax 11,780 23,320 (49.5) 27,310 (56.9) Net Profit after Minority Interest 7,207 15,740 (54.2) 21,590 (66.6) Adj net profit 7,207 15,740 (54.2) 25,810 (72.1) Source: Company data, I-Sec research

Most of the divisional EBITDA has been negatively impacted due to lower / subdued realisations, mainly owing to Cairn and power segment.

Aluminium business is expected to witness sequential increase in EBITDA, primarily due to lower power costs.

Zinc international segment should witness further ramp-up at Gamsberg mines, compensated by lower volumes from Scorpion mines.

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Hindustan Zinc (BUY) (QoQ chg: 3.7%; YoY chg: -22.4%) (Rs mn, year ending March 31) Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net Sales 46,216 55,400 (16.6) 45,110 2.5 Stock Adjustment - (250) (140) (100.0) Employee Expenses 2,000 2,150 (7.0) 1,920 4.2 Power costs 4,350 4,930 (11.8) 4,130 5.3 Mining Royalty expenses 5,800 6,700 (13.4) 5,390 7.6 Other expenses 1,280 1,349 (5.1) 1,264 1.3 Total expenditure 24,950 27,020 (7.7) 23,940 4.2 EBITDA 21,266 28,380 (25.1) 21,170 0.5 Other Income 5,390 5,500 (2.0) 5,900 (8.6) PBIDT 26,656 33,880 (21.3) 27,070 (1.5) Interest 400 510 250 60.0 PBDT 26,256 33,370 (21.3) 26,820 (2.1) Depreciation 5,530 4,890 13.1 5,950 (7.1) PBT 20,726 28,480 (27.2) 20,870 (0.7) Tax 4,560 6,080 (25.0) 60 PAT 16,166 22,110 (26.9) 20,810 (22.3) Production data (te) Zinc 1,66,000 1,88,000 (11.7) 1,66,000 - Lead 45,000 54,000 (16.7) 44,000 2.3 Silver 141 178 (21.0) 199 (29.3) Source: Company data, I-Sec research

Hindustan Zinc is expected to report 0.5% QoQ higher EBITDA for Q3FY20 mainly due to stable LME prices for zinc and lead.

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Hindalco (HOLD) (QoQ chg: 14.6%; YoY chg: 0.1%)

Standalone (Rs mn, year ending March 31)

(Rs mn) Q3FY20E Q3FY19 % Chg

YoY Q2FY20 % Chg

QoQ Net Sales 91,891 1,19,440 (23.1) 99,650 (7.8) Raw Material Consumed 50,742 78,325 (35.2) 59,070 (14.1) Stock Adjustment - (6,371) (2,740) Total raw material expenses 50,742 71,954 (29.5) 56,330 (9.9) Employee Expenses 4,650 5,111 (9.0) 4,840 (3.9) Manufacturing Expenses (Power & Fuel) 16,984 18,604 (8.7) 19,040 (10.8) Other Expenses 11,700 14,488 (19.2) 11,520 1.6 Total expenditure 84,076 1,10,158 (23.7) 91,730 (8.3) EBITDA 7,816 9,282 (15.8) 7,920 (1.3) -Copper estimated 2,514 4,311 (41.7) 2,630 (4.4) -Aluminum estimated 5,302 5,148 3.0 5,290 0.2 -Elimination/others (0) (177) - Margin (%) 8.5 7.8 7.9 Other Income 1,500 2,727 (45.0) 1,910 (21.5) Interest 4,280 4,337 (1.3) 4,280 - Depreciation 4,200 4,291 (2.1) 4,200 - PBT 836 3,381 (75.3) 1,040 Tax expense 209 562 10 Exceptional items - - - PAT reported 627 2,475 (74.7) 780 (19.7) PAT adjusted 627 2,475 (74.7) 780 (19.7)


Standalone + Utkal (Rs mn, year ending March 31)

Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Revenue from operations 91,891 1,19,380 (23.0) 99,660 (7.8) Aluminium 8,302 12,860 (45.8) 8,490 (2.2) Copper 2,514 4,310 (25.0) 2,460 2.2 Total EBITDA 10,816 17,170 (42.0) 10,950 (1.2) Other Income 1,800 2,090 111.8 1,560 15.4 Finance costs 4,650 4,770 0.2 4,780 PBDT 7,966 14,490 (46.4) 7,730 3.0 Depreciation 4,900 5,050 2.1 4,960 (1.2) Profit before exceptional items and Tax 3,066 9,440 (69.6) 2,770 10.7 Profit after tax 2,299 7,130 (68.7) 1,670 37.7


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Novelis (US$ mn, year ending March 31)

(US$ mn) Q3FY20E Q3FY19 % Chg

YoY Q2FY20 % Chg

QoQ Effective Net Sales 2,851 3,009 (5.2) 2,851 0.0 COGS 2,390 2,568 (6.9) 2,348 1.8

% of Net Sales 83.8 85.3 82.4 Selling General & Administrative 122 129 (5.4) 122 -

% of Net Sales 4.3 4.3 4.3 EBITDA 340 312 8.8 381 (10.9) Margin (%) 11.9 10.4 13.4 EBITDA/te(Rolled shipments) 400 392 2.1 456 (12.3) Depreciation & Amortisation 86 88 (2.3) 88 (2.3) R&D Expenses 17 18 (5.6) 18 (5.6) Interest Expenses 64 67 (4.5) 61 4.9 Others 14 23 14 Profit before tax and minority interest 159 115 37.9 168 (5.6) Provision (benefit) for taxes on loss 60 37 45 Loss before minority interests’ share 99 78 123 Minority Interests Share - - - Net Income (Loss) 99 78 26.4 123 (19.8)



(Rs mn) Q3FY20E Q2FY20 % Chg QoQ Net Sales 2,91,922 2,96,570 (1.6) Raw Material Consumed 1,75,153 1,70,370 2.8 Stock Adjustment - 1,060 Total raw material expenses 1,75,153 1,71,430 2.2 Employee Expenses 22,743 21,660 5.0 Manufacturing Expenses (Power & Fuel) 27,069 25,780 5.0 Other Expenses 43,791 41,390 5.8 Total expenditure 2,68,756 2,60,260 3.3 EBITDA 33,856 36,310 (6.8) Margin (%) 12 12 Other Income 3,000 2,870 4.5 Interest 9,100 9,220 (1.3) Depreciation 12,350 12,490 (1.1) PBT 15,406 14,910 3.3 Tax expense 4,622 5,180 (10.8) PAT reported 10,796 9,740 10.8 PAT adjusted 10,796 12,300


We expect 1.3% QoQ decrease in EBITDA (standalone) led by 4.4% decrease in copper EBITDA and stable aluminium EBITDA. LME prices increased marginally QoQ for copper and decreased marginally QOQ for aluminium, while volumes remained stable.

Novelis’ EBITDA is likely to decline 11% QoQ due to higher COGS leading to an EBITDA/te of US$400/te.

Consolidated EBITDA is likely to decrease 6.8% QoQ.


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NMDC (BUY) (QoQ chg: 39.9%; YoY chg: 34.9%) (Rs mn, year ending March 31) Q3FY20E Q3FY19 % Chg YoY Q2FY20 % Chg QoQ Net sales 29,721 36,494 (18.6) 22,418 32.6 Consumption of stores & spares 800 679 17.8 521 53.6 Employees cost 2,550 2,483 2.7 2,451 4.0 Selling expenses incl freight 1,350 1,697 (20.4) 1,150 17.4 Royalty & cess 5,908 7,201 (18.0) 3,508 68.4 Other expenditure 4,800 3,883 23.6 3,510 36.7 Total costs (Reported) 15,408 14,951 3.1 11,816 30.4 EBITDA (reported) 14,313 21,544 (33.6) 10,602 35.0 Margin (%) 48.2 59.0 47.3 Depreciation 650 694 (6.3) 976 (33.4) EBIT 13,663 20,850 (34.5) 9,626 41.9 Other income 500 1,361 (63.3) 1,275 (60.8) Finance Cost 96 96 - 97 (1.0) Exceptional items - - - NA PBT 14,067 22,115 (36.4) 10,805 30.2 Tax 4,642 6,347 (26.9) 3,771 23.1 PAT (Reported) 9,425 15,768 (40.2) 7,034 34.0 PAT (Adjusted) 9,425 15,768 (40.2) 7,034 34.0 Sales volume (mnte) 8.4 8.7 (3.0) 5.8 45.1 Realisation (Rs/te) 3,480 4,157 (16.3) 3,780 (7.9) Realisation (US$/te) 49 59 (16.9) 59 (16.7) EBITDA (Rs/te) 1,696 2,475 (31.5) 1,823 (7.0) Source: Company data, I-Sec research

Sales volumes increased by a sharp ~45% QoQ to 8.7mnte in Q3FY20. Realisations are expected to be lower by 8% QoQ, leading to EBITDA/te decreasing by 7% QoQ, given a higher operating leverage on better volumes.

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7

Jan

-18

Jul-1

8

Jan

-19

Jul-1

9

Jan

-20

(Rs)


11

Global metals/mining stock performances % change

1 month 3 months 6 months YTD 1 year China-Steel Angang Steel 10.5 11.0 (12.3) (0.0) (16.4) Maanshan Iron & Steel 13.0 17.4 (11.4) 0.6 (11.8) Hunan Valin Steel Tube 10.7 23.0 1.4 2.8 10.4 China Steel Corp 2.7 6.0 (0.3) (0.9) (0.6)

Japan-Steel Nippon Steel Corp (4.2) 9.1 (11.7) (1.0) (14.6) JFE Holdings (5.0) 6.6 (12.7) (1.5) (22.4) Kobe (4.1) 2.0 (18.6) (0.9) (25.3)

Korea-Steel Posco 2.7 8.5 (4.6) (2.8) (9.8) Dongkuk Steel Mill (0.1) (8.4) (18.8) (5.2) (27.1) Hyundai Steel (1.1) (16.5) (28.0) (7.1) (40.4)

India-Steel Tata Steel 17.0 45.5 (4.9) 0.2 (4.9) JSW Steel 3.3 26.4 (4.9) (2.4) (11.5) SAIL 17.7 40.4 (10.3) 5.4 (17.8) Jindal Steel 18.6 78.2 20.4 (0.8) 7.0

Russia Steel Severstal 8.8 10.7 (8.4) (0.9) 5.0 Evraz 9.9 0.4 (32.6) (3.0) (14.3) Magnitogorsk 10.2 26.8 2.4 1.0 7.7 Brazil- Steel CSN 8.3 10.4 (21.4) (0.2) 37.4 Gerdau 16.6 59.3 25.2 0.1 22.0 Usinas 6.4 28.2 (9.1) (1.9) (15.3) European Steel Thyssenkrup 5.6 (1.0) (1.0) 0.2 (24.6) Salzgitter 2.7 30.8 (19.4) (3.0) (28.9) Arcelormittal (5.2) 25.9 (1.0) (3.7) (21.8) US Steel AK Steel (3.1) 37.9 37.9 (4.9) 21.8 Nucor (6.4) 8.6 (2.5) (4.2) 1.0 US Steel (22.6) (1.2) (26.8) (5.4) (47.2) Steel Dynamics (5.7) 16.9 8.2 (2.8) 3.8 Aluminium Alcoa 1.9 9.1 (9.2) (2.4) (26.1) Hindalco 4.4 13.4 0.6 (4.0) (2.8) Norsk Hydro 6.8 7.1 1.5 (1.5) (22.2) Vedanta ltd 8.8 8.2 (9.1) 1.7 (22.3) Aluminium Corp of China 10.6 10.8 1.5 0.2 6.8 Century Aluminium 14.6 25.0 16.4 5.8 (8.6) Miners BHP Billton 6.5 13.6 (5.8) (0.4) 16.4 Rio Tinto 6.8 18.0 (2.7) (0.7) 31.5 Fortescue 8.5 21.8 19.8 (2.0) 159.0 Vale 5.7 16.9 (0.4) (0.8) (5.4) Coal India 6.0 10.4 (19.4) (3.3) (15.3) Cliffs Resources (4.3) 4.8 (27.8) (7.3) (10.2) Zinc Hindustan Zinc (0.1) 2.6 (13.6) 1.0 (25.4) Teck resources 4.1 9.3 (24.3) (3.6) (20.8) Freeport Mcmoran 10.4 46.7 13.8 (2.1) 16.8 First Quantum (2.4) 31.3 5.9 (5.7) 26.2

Source: Performance in US$ terms, Bloomberg, I-Sec research


12

Valuation methodology and key risks

Tata Steel (BUY, target price: Rs628): Maintain BUY. Steel prices remain the key risk to our forecast.

JSW Steel (HOLD, target price: Rs272): Maintain HOLD. Target price is based on FY21E EV/E of 6.5x (adjusted for acceptances). The concave nature of margins/earnings to volumes and costs is a matter of concern for a highly leveraged (operationally and financially) entity like JSW Steel.

JSPL (BUY, target price: Rs215): Maintain BUY. We follow the SoTP methodology for JSPL based on FY21E numbers. Inability to source coal over the longer run and gradual increase in leverage can make JSPL forego the benefit of lower fixed costs. This remains the biggest risk. Also, an adverse outcome in the CBI enquiry against the promoter remains a key downside risk. Upside risks are in the form of quick resolution of coal availability issues and a favourable steel cycle.

Vedanta (HOLD, target price: Rs145): Maintain HOLD. Target price is based on FY21E SoTP valuation. Commodity prices (particularly of zinc) are the key risk to our earnings and valuation estimates.

Hindustan Zinc (BUY, target price: Rs253): Maintain BUY. Target price is based on FY21E EV/E of 5.5x. Any material decline in commodity prices and lower than expected volumes remain the key downside risks.

Hindalco (HOLD, target price: Rs192): Maintain HOLD. Target price is based on FY21E SoTP valuation. Higher aluminium prices remain the key risk.

NMDC (BUY, target price: Rs149): Maintain BUY. Lower-than-expected sales volumes and extensive correction in iron ore prices are the key negative risks to our call.


13

Annexure

North Europe HRC China HRC China 62% iron ore

LME Copper LME Zinc LME Aluminium

LME Lead INR/USD INR/GBP

BRL/USD GBP/ EUR RUB/USD

Source: Bloomberg, I-Sec research

300

350

400

450

500

550

600

650

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Nov

-17

Ap

r-18

Se

p-18

Feb

-19

Jul-1

9

Dec

-19

(US

$/te

)

North - West Europe Domestic HRC

250

300

350

400

450

500

550

600

650

700

Jul-1

5

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

Jun

-18

Dec

-18

Jun

-19

Dec

-19

(US

$/te

)

China domestic HRC

35

45

55

65

75

85

95

105

Jul-1

5

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

Jun

-18

Dec

-18

Jun

-19

Dec

-19

(US

$/te

)

China 62% Fe

0

50

100

150

200

250

300

350

400

450

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Mar

-19

Jul-1

9

Dec

-19

(kte

)

(US

$/te

)

Copper LME inventories (RHS)LME Copper

0

100

200

300

400

500

600

700

1,400

1,900

2,400

2,900

3,400

3,900Ju

l-15

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Mar

-19

Jul-1

9

Dec

-19

(kte

)

(US

$/te

)

Zinc LME inventories (RHS)LME Zinc

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Mar

-19

Jul-1

9

Dec

-19

(kte

)

(US

$/te

)

Aluminium LME inventories (RHS)LME Aluminium

0

50

100

150

200

250

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Mar

-19

Jul-1

9

Dec

-19

(kte

)

(US

$/te

)

Lead LME inventories (RHS)LME Lead

61.0

63.0

65.0

67.0

69.0

71.0

73.0

75.0

77.0

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Nov

-17

Ap

r-18

Se

p-18

Feb

-19

Jul-1

9

Dec

-19

(US

D/I

NR

)

80.0

85.0

90.0

95.0

100.0

105.0

110.0

Jul-

15

Nov

-15

Ap

r-1

6

Se

p-1

6

Fe

b-17

Jul-

17

Nov

-17

Ap

r-1

8

Se

p-1

8

Fe

b-19

Jul-

19

Dec

-19

(GB

P/I

NR

)

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Nov

-17

Ap

r-18

Se

p-18

Feb

-19

Jul-1

9

Dec

-19

(BR

L/U

SD

)

1.0

1.1

1.1

1.2

1.2

1.3

1.3

1.4

1.4

1.5

1.5

Jul-1

5

Nov

-15

Ap

r-16

Se

p-16

Feb

-17

Jul-1

7

Nov

-17

Ap

r-18

Se

p-18

Feb

-19

Jul-1

9

Dec

-19

(GB

P/E

uro

)

48.0

53.0

58.0

63.0

68.0

73.0

78.0

83.0

Jul-1

5

Nov

-15

Apr

-16

Sep

-16

Feb

-17

Jul-1

7

Nov

-17

Apr

-18

Sep

-18

Feb

-19

Jul-1

9

Dec

-19

(RU

B/U

S$)


14

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