>Metals & Mining – Q3FY12 Preview

Problem of Plenty!!!!!


Q2FY12 ended with many problems and almost all the problems have increased further in Q3FY12. Companies have found it extremely tough to maintain their utilization levels and to manage the extremely volatile currency. However Q3FY12 numbers would be better than anticipated earlier as companies are able to hold on higher prices inspite of lull demand due to rupee depreciation.

■ Stable realization lessen contraction of EBITDA/ton for ferrous players

Inspite of lull demand, steel prices remained more or less stable during the quarter 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 Q3FY12.

■ LME and cost blues for Non Ferrous

Base Metals prices have significantly corrected during the quarter due to credit crisis in Europe and credit tightening in China. Lower LME price would be somewhat mitigated by higher volume however margins is set to fall for all companies due to higher input cost and adverse movement in currency.

■ Mining segment would be better

Mining segment is set to do better in this quarter due to higher production and favorable currency movement. CIL is set to increase its volume and firm prices will help the company to deliver better numbers. Rupee depreciation will provide cushion for Sesa Goa and will help the company to somewhat offset impact of lower volume and realization.

Outlook

Slowing global economy has taken a serious toll on Metal and Mining companies and the conditions are expected to remain tepid at least in next two quarters. However except Tata Steel, all other Indian companies have been impacted by India specific issues. The shadow of global slowdown is yet to come in Indian metals and mining space. We believe that ongoing issues like mining mess, policy paralysis and slowing economy are structural in nature and the condition are going to remain stressed at least in next two quarters. Thus we continue to maintain our negative stance on sector. However Inspite of directly exposed to Europe, Tata Steel remains our prefer pick due to structurally changing business model.

To read the full report: METALS & MINING

RISH TRADER

>PETRO MONITOR

What’s inside


1. Crude and natural gas prices………….……..…………….………...
2. Product prices and spreads………….………..…………..…...….....
3. Refining margins………………………….….……………..…..…....
4. Petchem and petroleum spreads……….…….……….……...……….
5. Production…………………………………..….…………..…..........
6. Inventory and product demand…………..………………......………..
7. Under-recoveries sensitivity……... …….………….................……….
8. Stock performance and valuations……………………………………..
9. Recent published reports …………………….........…..........................


To read the full report: PETRO MONITOR
RISH TRADER

>ZYDUS WELLNESS: Pressure on Everyuth & Nutralite margins to fall due to higher palm oil prices.

Management call: subdued FY12, long-term growth intact


High competitive pressure on the Everyuth brand, the cyclical downturn in SugarFree’s revenues and higher raw material costs for Nutralite have impacted Zydus Wellness’s performance over the past two quarters. We, however, believe the strong long-term growth
potential is intact and view the correction in the stock price as an attractive entry point. We maintain our Buy rating on the stock.


■ Higher competitive pressure on Everyuth. Everyuth continues to see high competitive pressures from MNCs. HUL has raised media spend on the face-wash and scrub categories, which account for larger part of Everyuth’s revenues. Pressure also comes from other players, such as Garnier and Nivea. This results in lower revenue growth for Everyuth.


■ SugarFree passing through a cyclical slow-growth patch. Management indicated that the current slowdown in SugarFree’s revenues is due to the four-quarter period of lower growth that SugarFree goes through after every 3-4 years, and that structurally the brand has strong
long-term growth potential. Management also indicated that Zydus’ market leadership has risen from 84% a year ago to 89% now.


■ Nutralite margins to fall due to higher palm oil prices. As 75% of the Nutralite business is institutional and has lower pricing power, the company expects to continue to suffer on the margin front as palm oil prices continue to rule higher due to rupee depreciation.


■ Excise duty to be lower from 2HFY13. As the company is required to pay excise in Sikkim and then collect the refund from the Government in the next year, the excise duty is likely to drop from the second year of operations. We expect the lower excise duty to start from 2HFY13.


■ Valuation. We value the stock at a DCF-based price target of `690. (Implied target PE of 30x FY13e earnings.) Risk. Higher competitive pressure.

RISH TRADER

>INDIA BANKS: Sector-wise credit growth trends

Riskier lending slowing down




Sector-wise analysis of credit growth
■ As of the last available sector level data released by the RBI (November 18, 2011), aggregate non-food credit growth was 16.8% yy with primary contributions from industry (20.9% y-y), services (16.9% y-y), retail (13.4% y-y) and agriculture (7.3% y-y). We expect credit growth to average 16.5% for FY12.


■ Working with 16.5% credit growth for the sector for FY12F, we have examined what proportion of this total credit target for FY12F has been completed so far by each of the major sectors and then compared it with the proportionate completion over the same period in FY11 and FY10. Looking at Figure 1, credit growth for the industry has completed 59% of the annual target so far in FY12, compared with 51% in FY11 and 38% in FY10. When adjusted for loans given to the power sector, industry has clocked 53% of the annual FY12 credit target (comparable proportions for FY11 and FY10 were 45% and 29%, respectively). In comparison, retail, SME and services sector credit have been relatively slower so far. We look at the subsector trends within each of these sectors in detail below.


■ Looking at the subsectors within industry category – and assuming a 16.5% credit growth target for the subsectors for FY12F – subsectors such as power, roads, iron & steel and engineering are well placed in terms of proportion of the annual target completed. Using this metric, the ‘roads’ subsector comes out as a clear topper, which is in accordance with some of the guidance given by banks and NBFCs a few quarters back (that order activity in the roads sector is expected to pick up). Textiles, food processing and telecom are clearly lagging so far, but seasonal priority sector lending effect could come into play for textiles and food processing.


■ Within retail loans – vehicle loans have tracked better so far than mortgage loans, while non-collateralized loans are clearly much slower. Mortgages have completed only 46% of the proposed annual FY12F target so far, compared with 59% in FY11 and 57% in FY10.


■ In the services sector – commercial real estate has been the biggest laggard. Major subsectors such as NBFC and Transport Operators are lagging so far this year due to regulatory uncertainty surrounding their priority sector status and ban on mining operations in certain parts of the country.


■ In priority sector lending – While manufacturing SMEs are on track, service-driven SMEs are clearly lagging behind. While decline in agri credit could get reversed on the back of strong Rabi harvest and fourth quarter push, small ticket mortgage book could be a laggard.


How to read the charts - In the charts below we have plotted the YTD change in outstanding bank credit to different sectors as a ratio of full year change in their respective loan books. And then we have compared it across FY12, FY11 and FY10. While for FY10 and FY11, we have
used the actual annual change in loan book as the denominator, for FY12 estimates we have used our assumption of uniform credit growth of 16.5% across all categories to arrive at the denominator. The figures in parentheses indicate the category’s current loan book as a proportion of overall bank credit.

Fig. 1: YTD change in bank credit as % of full year change

Credit to Industry on track, retail and SME growth sluggish in FY12

Fig. 2: Breakdown of YTD change in industry loan book

Power and road sector drive strong growth, chemical and telecom lag

Fig. 3: Breakdown of YTD change in retail loan book

Mortgage growth weaker in FY12, non-collateralized book a laggard

Fig. 4: Breakdown of YTD change in services loan book

Trade finance, lending to NBFC on track, realty and transport laggards

Fig. 5: Breakdown of YTD change in priority sector loan book

RISH TRADER