>FERROUS SECTOR: SAIL, NMDC, TATA STEEL & JSW STEEL

Following significant underperformance of companies in the ferrous sector to the tune of 23% in the past six months compared to the Sensex, we remain negative on the sector. Although steel companies may benefit because of lower raw material prices, particularly coking coal, the rupee depreciation has offset entire gains. Steel prices may not rise significantly because of correction in international markets and deteriorating economic conditions in India and in fact are likely to quote at a discount to global prices. We continue to retain our Sell rating on the sector


JSW Steel: We have cut our FY13 EBITDA and PAT estimates by 10% and 25%, respectively, driven largely by higher costs because of substantially weaker rupee-US dollar assumption at Rs54/$ for FY13 and losses at Ispat Industries. We continue to retain our Sell rating on the stock with a revised target price of Rs500 (down 8% from our earlier TP of Rs545). We have marginally lowered our FY12 volume assumption by 1.2%, but we have kept our volume assumption constant for FY13. We have increased our target multiple from 3.5x to 4.0x FY13 EV/EVITDA considering the time series. Our revised TP is 12% below the CMP.


NMDC: We continue to retain our Sell rating on NMDC with a revised TP of Rs154 (down 31% from our earlier TP of Rs222). We have cut our EBITDA estimates by 1% and 9% for FY12 and FY13, respectively. PAT estimate for FY12 has been revised upwards by 3% due to higher other income, although it has been revised downwards by 7% for FY13. We have also revised our valuation multiple assumption from 6.0x to 4.0x in view of deteriorating economic conditions in India and an overall bear cycle in iron ore. Besides this, we are even assigning a 25% discount to the CWIP as the deteriorating environment for commodities will lower the returns from projects. We are also assigning a 10% discount to the cash surplus as we remain cautious about fund utilisation in the wake of the new disinvestment policy, which entails cross-holding in other state-owned companies. Our revised TP is 11% below the CMP.


Steel Authority of India: We have cut our FY13 EBITDA and PAT estimates by 1% and 3%, respectively, after factoring in rupee depreciation. We retain our Sell rating on the stock with a revised TP of Rs76 (down 16% compared to our earlier TP of Rs90). Our TP cut is steeper that the reduction in earnings, driven largely by the change in valuation of CWIP. We are now assigning a 20% discount to CWIP compared to zero discount earlier, as we expect the prolonged economic slowdown in India to result in higher single-digit RoCE and RoE for new projects. At an EBITDA of Rs7,000/tonne also, the new projects are likely to generate RoCE and RoE of 8.3% and 10.6%, respectively. Our revised TP is 10% below the CMP.


Tata Steel: Tata Steel’s FY13 consolidated EBITDA and PAT estimates have been cut by 12% and 27%, respectively, because of factors like higher cost of domestic operations due to rupee depreciation, lower steel prices in Europe because of demand slowdown and a marginal drop in volumes in Europe as well as India. We retain our Sell rating on the stock with a revised TP of Rs341 (down 5% from our earlier TP of Rs358). However, we have increased our target multiple from 3.5x to 4.0x FY13 EV/EBITDA considering the time series. Our revised TP is 6% below the CMP.


RISH TRADER