>NON FERROUS MINING: Lowering estimates for metal price changes

■ Lowering estimates on metal price changes

Our Metals Strategist has cut metal price forecasts due to the global slowdown and MTM. Our global team has cut FY13e price forecasts for Al by 11%, Cu by 7% and Zn by 3%. We also factor in a weaker INR, which cushions the impact. We have cut our FY13e EPS by 6-16% and our POs by 4-11% across our base metal companies. We remain cautious due to macro concerns. Valuations appear reasonable, but downside risks to est. exist and upside triggers are lacking, in our view. We prefer Sterlite, as it offers deep value and the risk/reward appears positive. In HNDL, triggers are absent, as project issues are unresolved.

■ Zn: lower surplus; Al: tight physical mkts., but deficit lower

We expect zinc prices to be capped, as zinc markets are well supplied. But zinc prices should be supported near current levels as we expect concentrate markets to tighten through CY12 and eventually push refined markets into deficit in CY13. In aluminum, despite structural excess capacity, we believe financing deals should support Al prices in CY12. However, we expect physical markets to be less undersupplied due to slowing demand growth. Our FY12/FY13e LME price forecast for zinc is US$2029/t/US$2150/t and for Al, it is US$2247/t/US$2313/t.

■ Sterlite (STLT): Offers deep value, favorable risk reward

We have cut our FY12-13e EPS by 2-7% due to lower metal price forecasts. Downside risk to Zn prices appears low and the medium-term outlook appears positive. Saleable silver (Ag) volume is likely to increase post the expected commissioning of a 350tpa silver refinery in Dec Q. We expect Ag vols. to grow at a CAGR of 26% over next 3 years and should contribute to 8% of FY13e EBITDA. Coal supply issues should persist at SEL, but availability should improve

incrementally in 2HFY12, as CIL output improves post monsoon. Valuation, at 3.0x FY13e EBITDA, appears attractive and concerns around SEL and VAL assets appear to be already priced in.

■ Hindalco: Reasonable valuations, but catalysts absent

We have cut FY13e EPS by 6% due to the lower Al price est. We have also cut Novelis FY12-13e EBITDA by 2-5% (in US$ terms) due to softer demand, but the impact on group EBITDA is offset due to the weaker INR est. Govt. approval w.r.t. Mahan coal block is still pending. Govt. decision to scrap Go/No Go classification of coal blocks offers some hope, but production from new coal blocks could take over 12-15 months, even after approval is obtained. Thus, EPS impact will not be meaningful near term, in our view. Valuation, at 0.8x BV, offers downside support.

■ NALCO – cost pressures persist, valuation not compelling

Our FY12-13 EPS declines by 2-16% due to the lower AL LME forecast. We expect cost pressures to persist due to coal supply issues. The valuation, at 6 .6xFY12e EBIDTA, is not yet compelling, in our view. Hence, Underperform.

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