In a reversal of fortunes, we expect mining companies to outperform their metals’ peers in Q1FY20. Earnings for companies in the ferrous space are expected to be compressed by the continued decline in spreads and the pressure on volumes. On the non-ferrous front, sliding LME prices are expected to keep earnings subdued. That said, we view mining companies NMDC and Coal India as the bright spots—NMDC is likely to benefit from a volume uptick and Coal India from robust e-auction premium and FSA prices. Going ahead, we expect:
1) the inventory build-up in Q1 and a seasonally weak second quarter to keep earnings momentum for ferrous companies subdued in the near term;
2) the limited uptick in non-ferrous companies’ earnings due to subdued LME prices; and
3) NMDC and Coal India to benefit from high iron ore prices and volume uptick, respectively.
Our preferred picks in the sector are JSPL (TP: INR210, exit multiple: 6.2x; FY21E EBITDA), Hindalco (INR230; exit multiple: 6.3x; FY21E EBITDA), and NMDC (INR135; exit multiple: 5.5x; FY21E EBITDA).
Precipitous decline in EBITDA likely at ferrous companies
We expect a sharp decline in EBITDA/t for all ferrous companies led by the twin impact of lower spreads and the demand slowdown. Raw material (RM) spreads for non-integrated players declined 8% through the quarter, settling at INR22,310/t—the lowest in past 21 months. On the volume front, JSW Steel, SAIL and Tata Steel may suffer from lack of export avenues, lackluster domestic demand and auto downturn, respectively. However, JSPL (up 10%YoY) is expected to reap the benefits of operating leverage. Also, higher proportion of value-added products is expected to aid margins.
No respite for non-ferrous companies as well
On the non-ferrous front as well, there is no respite with LME aluminium (Al) and LME zinc (Zn) prices plunging 21% YoY and 19% YoY, respectively. A slower-than-expected ramp-up at Rampur Agucha is expected to dent HZL’s and Vedanta’s performance. Hindalco’s (standalone) EBITDA is expected to make a low since Q3FY16 owing to reversal in LME Al prices and TC/RC margin.
Mining companies expected to outperform
Mining companies NMDC and Coal India are expected to outperform their ferrous peers. NMDC is expected to benefit from solid volume growth of 30% YoY at 8.9mt and higher export prices, up 51% YoY at USD 94/t. Coal India is expected to benefit from better FSA realisation (owing to higher FSA contracts for non-regulated players moving to linkage coal) and robust e-auction premium (likely unchanged from Q4FY19 at 88%).