>Metals – Ferrous & Mining: Q4FY12 Result Preview

Sequential improvement on lower costs and higher volumes


Higher volumes on account of seasonal improvement in demand, improved realizations on a sequential basis and lower raw material costs (particularly for steel producers) are expected to result in a sequential improvement in profitability for metal companies in our universe during Q4FY12. We see the earnings improvement in Q4FY12 to be more seasonal in nature rather than structural and still remain concerned on the low demand-high supply dynamics in the global metals space. We maintain our cautious stance on the ferrous space but remain positive on the mining space on account of attractive valuations and low costs.


■ Sales volume to improve sequentially: We expect volumes to show sequential improvement on the back of higher seasonal demand. Steel players are expected to show volume growth with SAIL and JSW steel showing sequentially higher sales. Among base metal players, HZL will see increase in lead and silver volumes.


■ Realizations remain firm: Global base metal and steel prices improved during the quarter and with rupee remaining weak, we expect domestic realizations to remain firm on a sequential basis and result in sequential revenue growth. Mining players are expected to suffer a drop in realizations on a QoQ basis due to drop in global prices.


■ Margins to remain weak despite sequential improvement: Margins are expected to improve by 100-300 bps QoQ for metal players in our universe but still remain weak on an overall basis and lower YoY as the recovery in demand remains slow.


■ Profits to remain subdued: We expect pressure on PAT due to higher interest costs and expect only marginal recovery in MTM forex losses of previous quarters as rupee has remained
weak overall. We expect sequential improvement in PAT from all companies under our universe except NMDC which has suffered due to lower volumes in Q4FY12E.


■ Maintain cautious view on the ferrous space: We remain Cautious on the domestic ferrous space amidst tough operational environment and subdued global steel prices going ahead due to higher supplies. We also expect raw material prices to spike yet again going ahead. We maintain buy on mining stocks like NMDC and HZL on attractive valuations and volume growth. We remain neutral on Sterlite Industries due to concern over the proposed merger with Sesa Goa. We maintain sell on Tata Steel and SAIL.


RISH TRADER