Metals and Mining – Q2FY20 result preview-Slip, slide and tumble
We expect companies under our coverage, particularly ferrous, to report tepid earnings in the wake of lower prices and weak demand. Key highlights:
1) Ferrous companies might suffer EBITDA compression of INR2,500–3,000/t.
2) Volumes are expected to decline for all major ferrous players, except JSPL.
3) Non-ferrous companies are likely to report flat production growth.
Going ahead, we expect:
1) ferrous companies to remain under stress owing to a sharp dip in domestic steel prices;
2) stable LME prices (at lower levels) to result in subdued growth for non-ferrous companies; and
3) mining companies to benefit from a volume uptick, though realisations are expected to remain stagnant.
Our top picks are Hindalco (TP: INR235, exit 6.1x FY21E EBITDA), JSPL (TP: INR150, exit 6x FY21E EBITDA) and Coal India (TP: INR225, exit 8x FY21E EPS).
EBITDA dip in store for ferrous; non-ferrous to fare better
We expect a lower EBITDA/t of INR2,500–3,000/t for all ferrous companies buffeted by lower spreads and demand slowdown. Average raw material spreads for non-integrated players decreased 7% QoQ to INR20,553/t. On the volume front, we expect a dip of 5–7% for major players, except JSPL, and a shift in product mix towards higher exports. In case of non-ferrous, LME price decline for aluminium (down 14% YoY) and zinc (down 7% YoY) is expected to result in earnings decline as production levels on average remained stagnant. Mining companies – Coal India and NMDC – are expected to suffer from adverse operating leverage owing to a 11–12% YoY dip in volumes. Smaller companies – Jindal Stainless and GMDC – are expected to fare relatively well.
Watch out for production guidance
Given our expectation of volume decline at most companies, we believe that production guidance is the key factor to watch out for, particularly in case of ferrous companies, which are saddled with high level of inventory. In case of non-ferrous companies, we will watch out for guidance on oil & gas production volume by Vedanta and zinc volume by HZL .
Consensus estimates at risk for most companies
We see a good possibility of a 15–20% cut in consensus forecasts post-Q2FY20 results, which would recalibrate the currently attractive valuation to the ones seen in trough cycle ones. Downward revisions are more probable for Tata Steel, SAIL and Coal India.
Hindalco, JSPL and Coal India