>Metals & Mining – Q2FY12 Preview

Q2FY12 was very eventful for the entire Metal and Mining space. The sector is facing many demons all at a time (fear of global recession, ongoing slump in Indian markets, regulatory blows on mining and industry unfriendly mining bill). Nevertheless, Q2FY11 numbers would be better than anticipated earlier as companies are able to hold on higher prices inspite of lull demand. Thus the contraction in margins will be much lesser than earlier expectations.

Stable realization lessen contraction of EBITDA/ton for ferrous players

Inspite of lull demand, steel prices remained more or less stable during the quarters due to ongoing mining crisis in Karnataka. Stable realizations will help companies to somewhat mitigate higher raw material prices. EBITDA/ton of ferrous players are expected to fall by ` 1000-1500/ton during Q2FY12.

Non-ferrous results would be better, mining to take a hit

Base Metals prices have marginally corrected during the quarter due to credit crisis in Europe and credit tightening in China. However the correction is very marginal to have a material impact on company’s financials. Sterlite and Hindustan Zinc are expected to report good numbers due to volume ramp up in Zinc and power business and improved Tc/Rc margins. NALCO and Hindalco are expected to benefit from high alumina and aluminum prices. Mining segment is hit hard by ongoing mining crisis and very heavy rains. Both volume and profitability of mining companies are expected to remain subdued.

Outlook

We continue to maintain our cautious view on the sector as slump in demand is much higher than expected and thing are still not moving on ground. Moreover fear of recession in the western world and sovereign default risks of Euroland has made things very difficult for the sector. We believe that H2FY12 is going to be tough for metal and mining space and companies will see margin contraction and lower growth. Inspite of negative view, we believe that there are few structural stories unfolding in the Indian Metal and Mining space and the correction should be used to accumulate good quality stocks. Our top picks in the sector are – Tata Steel and Sterlite Industries.

To read the full report: METALS & MINING