>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.

To read the full report: NON FERROUS MINING

RISH TRADER

>INDIA CONTENDERS AND DEFENDERS: Contenders outperform amid macro uncertainty

■ Contenders beat the markets

The India Contenders (-13.7%) struggled last month as equity markets retraced

amid European crisis and weakening rupee, but still managed to outperform the

MSCI India index (-16.0%) by +2.3% and the India Defenders (-23.8%) by +10.0%.

■ Implied Sector Allocation favours Discretionary

Our Implied Sector Allocation model is most overweight Consumer Discretionary

and Health Care, and most underweight Financials, Materials and Industrials.

Last month, the model increased the overweight in Health Care at the expense of

Financials. This sector tilts matches with our new Asia Pac Country-Sector

allocation recommendations.

■ New India Contenders: Hero Motorcorp, Raymond

The new India Contenders are Hero Motorcorp, and Raymond. The longest

standing Contender is Bajaj Auto (16 months). The other India Contenders are

Dish TV India, HDFC Bank, LIC Housing Finance, Petronet LNG, Satyam

Computer, Tata Consultancy Services, and Titan Industries.

■ New India Defenders: JSW Steel, Sesa Goa

The new India Defenders are JSW Steel, and Sesa Goa. The longest standing

Defender is Steel Authority of India (15 months). The other India Defenders are

Crompton Greaves, Hindalco Industries, Housing Development & Infrastructure,

Reliance Communications, Sterlite Industries (India), Tata Motors, and Unitech.

To read the full report: CONTENDERS AND DEFENDERS

RISH TRADER

>EUROPEAN CREDIT OUTLOOK 2012: fasten your seatbelts

■ Slaves to the Euro crisis

We would expect a small rally at the start of 2012 as risk appetite rises, asset

allocation into credits occurs and the probability grows of a greater policymaker

response. We would start the year with an overweight-30% on high-grade credit,

but we would not be wedded to this view for long if the sovereign prognosis

remains bleak. We see a trading market rather than a directional market for 2012

as the sovereign crisis continues to determine much of the direction of credit.

■ Know your benchmark in 2012

“Rich” or “cheap” is more than just about spread to Bunds now. We urge investors

to keep an eye on credit spreads vs domestic government bond spreads next

year. French names have repriced significantly wider lately because of poor

relative value vs. French sovereigns. In our view, German credits look good value

versus their sovereigns, as do UK and Dutch credits. Spanish and Italian nonfinancials

look tight. French non-financials look fair rather than great value.

■ Non-financials fairly safe for another year

We still see “core” non-financials faring relatively well next year, even if recession

hits. Maturing corporate debt isn’t demanding, cash holdings are strong and

spreads already discount a further earnings drop of about 25%. Defensiveness

and capital preservation remain paramount for credit selection, in our view.

■ The great opportunities as well as risks

Loan refinancings are a lot more demanding next year (€500bn) and banks are

preoccupied with deleveraging. We don’t think this means the end of loan

financing for large-cap, “relationship” non-financials, but funding could become

trickier for mid-tier companies. We expect companies to term-out some of their

loan financing into bonds next year, even if for precautionary purposes.

■ More corps, less fins

We expect fixed-rate senior unsecured issuance to fall 35% in 2012 vs 2011.

Conversely, we think non-financial supply could rise 20%.

■ Sectors – go for global

We have made some changes at the sector level. We upgrade consumers to ow-

30% given their global sales profile. We still remain uw-30% on retail however

given austerity. Senior banks is still an ow-30% as the market shrinks, but sub

debt is now uw-30%. Insurance fundamentals still justify an ow-30%. We have

reduced steel to uw-30% given waning steel demand.

To read the full report: EUROPEAN CREDIT

RISH TRADER

>CAIRN INDIA LIMITED: We believe new promoters will support Cairn India’s production growth endeavours

We expect regulatory approvals to be the next catalysts for the stock. Government of

India has in principle approved the Cairn/Vedanta deal after Cairn India agreed to share

royalty and cess on its production from Rajasthan fields; however, some routine approvals

are due. We expect these approvals by the end of the year, which should pave the way for

production growth from 125,000bopd currently. Furthermore, we believe the new

promoters namely Vedanta Group will support Cairn India’s ramp-up endeavours as they

have done with their previous acquisitions (details in the note).

The current environment of stronger oil prices, rupee depreciation and narrow heavylight

spread should benefit Cairn. Despite worries concerning global growth, crude oil has

remained around the current level of more than US100/bbl. Our analysis indicates that the

Brent oil price is unlikely to fall below USD90/bbl (refer to the note by our global oil team:

‘2009 all over again? We doubt it’ dated 11 August 2011). Also, rupee depreciation is likely to

benefit Cairn India, which sells crude oil in US dollar denomination. With the return of oil

production from Libya, the spread between heavy-light crude has fallen, which could also

moderately decrease the discount that the company offers on its Rajasthan crude. Our

valuations are for Brent of USD90/bbl, INR45/USD and an 11% discount to Brent against

current crude oil price of USD110/bbl and USD/INR of 52.

Rajasthan block, the main value driver has significant upside potential. Our detailed

analysis indicates substantial reserves upside in CIL’s Rajasthan block, which is currently

producing 125,000bopd. We believe the in-place oil volume can more than double with

the consequent increase in probability-weighted reserves by c40%. It is important to note

that the Rajasthan block constitutes c95% of our current valuation for CIL.

Valuation and risks. We reiterate OW on the stock with a target price of INR350. We

value Cairn India on DCF for production from known reserves, and a risk-weighted

multiple for reserves upsides. Lower crude oil price, rupee appreciation and slower pace

of production ramp-up are key risks to our rating.

To read the full report: CAIRN INDIA

RISH TRADER