>METAL SECTOR (CENTRUM)

Meltdown over, time to solidify

■ Sector upgraded to Overweight: Our upgrade is premised on stabilizing metal prices after a sharp rally and improving business confidence. Aluminium prices have risen 16% from their Dec 2008 lows while copper and zinc have surged 59% and 43%, respectively. However, steel prices remain mostly unchanged at US$425/tonne. Prices of base metals have increased 30- 50% in Nov 2008 and are stabilizing at the current level. Besides, we believe that weakening dollar would further give support to the commodity prices going forward.

■ Return of business confidence the main trigger: We believe this price stabilization is the result of arrest in demand decline and decline in inventory as a result of production cuts, destocking and the return of buyers on increased business confidence.

■ Earnings unchanged, but valuations upgraded: We have not revised the earnings estimates but upgraded ratings of metal stocks within our coverage on improved business confidence over last two months, based on China’s rising Purchase Managers Index (PMI). A stable government in India and increased business confidence would lead to higher investment and consumption, which would ultimately lead to a re rating of the sector.

■ Valuing stocks on underlying commodity prices: We have valued stocks on the basis of underlying commodity prices, which we expect to remain stable going forward. We have considered the ratio of stock and underlying commodity prices to arrive at our target
price under an optimistic scenario.

■ Top Buy - Tata Steel; Top Sell – Nalco: We have upgraded Hindalco to Accumulate (Reduce) and JSW Steel to Accumulate (Reduce) as steel and base metals prices have stabilized and we do not expect further declines from current levels. We prefer Tata Steel and JSW Steel to SAIL, given the higher sensitivity of their earnings to steel prices. We retain Sell on Nalco with a
price target of Rs240.

To see full report: METAL SECTOR