Thursday, January 5, 2012

>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.

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