Institutional Equity Research Metals & Mining | India

Quarterly Data: Steel Volume ('000 T) Production Imports Exports Consumption 4QF13 21,010 2,112 1,524 18,531 4QF12 % YoY 20,955 1,879 1,540 18,265 0.3 12.4 (1.0) 1.5 3QF13 % QoQ 19,041 1,904 1,410 18,065 10.3 10.9 8.1 2.6

4QF13 Metals & Mining Preview

Profitability to remain under pressure

April 15, 2013

Source: JPC, SSL

LME Price Movement 4QF13 Copper Aluminium Zinc Lead 7,965 2,043 2,033 2,311 4QF12 8,329 2,219 2,028 2,093 %YoY (4.4) (7.9) 0.2 10.4 3QF13 7,924 2,017 1,945 2,198 %QoQ 0.5 1.3 4.5 5.1

Steel realization is expected to remain flat for Q4F13 on a sequential basis but benefits of lower iron ore and coking coal prices to improve earnings sequentially. However, on non ferrous front improved production level due to better capacity utilisation will help drive the revenue, base metal prices for the quarter remained flat to marginal positive. Mining: Realizations expected to be down on a YOY basis, but higher production levels (except GMDC) should yield improvement in earnings. For GMDC, we expect volume to remain under strain. New mines commissioning and added investment in non-core activities will be the key things to watch for the cash rich companies. Global steel prices recover; Indian steel prices remain flat due to weak demand: Steel prices bounced back QoQ in 4QF14 across all regions. HRC prices improved in range of 6%-10% in CIS, Europe and China. Improvement in global steel prices by ~US$60/T made room for Indian steel manufacturers to raise prices. However, due to subdued demand, Indian steel prices have remained under pressure. Domestic steel producers did attempt to increase the prices in the past few months, but subdued demand and oversupply curtailed meaningful increase in prices. Flat prices for the quarter remained flat, however long prices increased merely by ~2% QoQ. Steel demand in 4QF13 grew marginally by 1.5% YoY to 18.5MT and production same period grew marginally by 0.3% YoY to 21MT. EBITDA/tonne to improve on a QoQ basis: Iron ore prices increased during the quarter owing to higher demand from China. Declining supplies from India was offset by increased exports from Australia (~300MT in Apr-Jan2013). Quarterly average iron ore prices (63.5% Fe fines CFR, China) rose ~ 24.7% QoQ to US$138/t and average coking coal prices increased ~8.3% QoQ in 4QF13. We expect steel companies within our coverage universe to report marginally better numbers on a QoQ basis with EBITDA/tonne improving for steel companies on the back of recent price increase taken by domestic manufacturers amid subdued coking coal prices. Within our coverage universe for 4QF13, we expect EBITDA/tonne of Tata Steel India at Rs14,136/tonne (vs Rs13,387/T in 3QF13) and JSW Steel at Rs6,506/T (vs Rs6,054/T in 3QF13). Ferrous outlook: We expect margin to improve YoY basis on back of recent price increases and lower coking coal prices. Iron ore prices are in range of US$130135/T (marginally above many Chinese iron ore miners). Contracted coking coal prices have come down gradually YoY however Rupee depreciation will partly offset the benefit of lower coking coal cost. We believe that steel prices will continue to remain weak on account of subdued global and domestic demand. Both iron ore and coking coal prices have again started to correct, which will weigh negatively on steel prices. Indian steel producers are also facing additional pressure due to increased capacity. We believe that steel prices will continue to remain under pressure. Non-ferrous outlook: During the quarter, base metal prices have remained range bound. On QoQ basis, average base metal prices increased in range of ~1%-5%. Inventory during the same period increased by 67.6%/4.4%/1.1% for copper / zinc / aluminium respectively. For 4QF2013, we expect margins of non-ferrous companies to be under pressure YoY owing to lower LME prices. In addition, increase in cost will result in decline in PAT on a YoY basis.

Source: Bloomberg, SSL

Currency Movement 4QF13 Average USD/INR EUR/INR Closing USD/INR EUR/INR 54.28 69.50 50.88 68 6.7 2.4 55.00 73 (1.3) (4.1) 54.17 71.50 50.30 66 7.7 8.5 54.15 70 0.0 1.7 4QF12 %YoY 3QF13 %QoQ

Source: Bloomberg, SSL

Prefer Mining over Metal: Top Pick Hindustan Zinc GMDC

Performance
120 90 60 30 0 Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

SENSEX Index

BSEMETL Index

Source: Bloomberg, SSL

Jatin Damania +91 22 4227 3361 jatin.damania@sbicapsec.com

SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com

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Metals & Mining 4QF13 Preview

SBICAP Securities Ltd

Quarterly Estimates: 4QF13

EBITDA Margin Company Tata Steel Jsw Steel Hindalco Hind Zinc NALCO SEML* GODPI* Revenue 352,715 83,817 66,213 33,599 16,659 4,138 6,330 YoY% QoQ % 3.7 (12.2) (13.4) 7.2 (6.6) 37.0 (3.6) 9.9 1.1 (3.6) 5.7 (1.6) 11.1 5.0 4QF13e 4QF12 9.5 16.4 8.9 48.3 12.6 20.4 14.8 9.3 17.3 11.3 53.9 17.2 24.3 14.8 PAT 2,458.5 3,498.2 3,027.2 16,800.7 1,416.2 576.0 373.5 YoY% (43.3) (53.5) (52.7) 16.3 (35.1) (32.7) 13.4 QoQ % NA 155.8 (30.2) 4.2 19.1 114.1 102.2

*SEML: Sarda Energy & Minerals; GODPI: Godawari Power & Ispat

Mining NMDC GMDC COAL India MoIL Source: SSLe 22,455 4,941 186,944 2,453 (13.5) (8.0) (3.7) 21.7 9.7 39.8 7.9 7.5 65.8 45.8 24.5 50.4 76.2 45.8 19.5 42.7 13,910 1,451 44,650 1,203 (17.9) (8.6) 11.3 21.0 7.6 9.4 1.6 (1.5)

Company specific
Tata Steel HOLD | Rs336

Uncertainty on European business prevails During the quarter, we expect domestic operations to report 17.5% QoQ increase in EBITDA, on back of higher steel volumes. We expect steel volumes to be ~2.2MT. EBITDA/T is expected to be ~US$257/T backed by lower coking coal cost and reduction in coke purchase. Weakness in European business operations to continue, we expect TSEs sales volume of ~3.2MT and EBITDA/t of US$6.6. Things to watch: TSE funding plan for modernization program, as cash flows from current operations (TSE) are not sufficient to fund its plan; impairment of goodwill if any; commentary on sale of assets to repay debt Valuation: At CMP, stock trades at 11.3x F14e earnings and 5.4x F14e EBITDA. In Europe, the environment remains challenging due to weak demand and volatile input prices. On the other hand, due to subdued demand in domestic market and oversupply situation steel prices are likely to remain under pressure. We maintain our HOLD rating, with a revised target price of Rs336.

JSW Steel

HOLD | Rs710

Near term issues an Overhang but to ease off incrementally We expect 2.1MT saleable steel volume in 4QF13, down 3% QoQ, realisation to remain flat to marginally and EBITDA/T of Rs6,506 up 7.5% QoQ largely due to lower coking coal costs. Things to watch: Production guidance for F14, given availability of iron ore in Karnataka; iron ore procurement strategy; expansion plan status for JSW Ispat Valuation: At CMP, the stock trades at 11.2x F14e earnings and on EV/EBITDA it trades at 5.3x F14e EBITDA. Despite the current challenging environment, we believe there would be steady improvement in profitability for JSW Steel due to decline in coking coal cost and marginally improvement in realizations. We maintain our HOLD rating on the stock.

jatin.damania@sbicapsec.com

April 15, 2013 | 2

Metals & Mining 4QF13 Preview

SBICAP Securities Ltd

Hindalco

BUY | Rs120

Countdown on commissioning of units We expect revenue to decline 3.6% QoQ due to fall in copper volumes. Expect other income to decline QoQ, as in 3QF13 had non-recurring income of Rs1.4bn. PAT to decline 30.2% QoQ. On Novelis front, we expect sales volume of ~745KT and EBITDA/T of US$307, improvement QoQ as operations in last quarter were affected due to ERP implementtation Things to watch: Commissioning date of Utkal refinery and Mahan smelter; update on stage II clearance on Mahan coal block; Valuation: At CMP, stock trades at 6.4x F14e earnings and on EV/EBITDA it trades at 6.6x F14e EBITDA. We believe it offers favourable risk adjusted returns although its investments in new projects have low IRRs currently, currently, which are expected to reverse in future. We maintain our BUY rating (valuing it at 6x F15e EBITDA), on the back of stable downstream earnings and aluminium operations to drive benefit post commissioning of Utkal. Any delay in commissioning of Greenfield projects will spoil the atmosphere.

Hindustan Zinc

BUY | Rs140

Valuation provides comfort, upgrade to BUY We expect higher volume to help 8.6% QoQ increased in EBITDA. Mine metal production is expected to remain flat QoQ, while refined lead/zinc production is likely to increase QoQ to 223kt. We expect QoQ decline in other income, as in 3QF13 MTM gain on bond portfolio was included in other income Things to watch: Owing to lower ppm, silver volume in 9MF13 has been disappointed. Improvement in ppm levels will result in higher silver production; Management commentary on the Supreme Court approval for restarting of mines Valuation: At CMP, stock trades at 7.8x F14e earnings and on EV/EBITDA it trades at 3.5x F14e EBITDA. We maintain our target price of Rs140, but upgrade the stock to BUY (Hold) driven by higher RoE, attractive valuation, strong balance sheet and strong free cash flow generation. Vedanta groups exercise of its call option to buy out the 29.5% Governments stake in HZL is likely to provide support.

Nalco

HOLD | Rs38

Alumina to drive profitability We expect alumina business to drive profitability on back of increased in alumina sales volume QoQ to 216KT and sequential improvement in realisation to US$343/T During 4QF13, we expect cost efficiencies in term of caustic soda, linkage coal will help company to report 180bps expansion in margin to 12.6% Things to watch: Commentary on Panchpatmali mining lease renewal, as company is operating on temporary permit license; land acquisition status for Utkal coal block; progress on various capex (NPCIL, JV with GMDC to name few) Valuation: We expect margin improvement going forward, on back of lower cost and higher alumina sales. With no debt and Rs~48bn of cash as on Dec12 translating into cash/share of Rs18.6 act as a key support for earnings. At CMP, stock trades at 11.2x for F14e earnings and on, EV/EBITDA it trades at 3.7x F14e EBITDA. We maintain our Hold rating on the stock.

jatin.damania@sbicapsec.com

April 15, 2013 | 3

Metals & Mining 4QF13 Preview

SBICAP Securities Ltd

Godawari Power & Ispat

BUY | Rs109

Margin to improve going ahead We expect pellet sales volume to increase during the quarter Margin to improve on QoQ basis owing to higher pellet sales and increase captive mining Things to watch: Subsidiary sales volume in pellet and ferro alloys; F14 guidance on captive mining Valuation: At the CMP, the stock trades at 2.1x F14e earnings. On EV/EBITDA, it trades at 3.2x F14e EBITDA, which is discount to its peers. We expect the companys performance to improve in the coming quarter with increase in captive mining. In addition, strong performance from Ardent Steel will further aid to companys profitability. We maintain a BUY rating on the stock with a revised target price of Rs109 (valuing at 3.5x one year forward EBITDA).

Sarda Energy & Minerals

HOLD | Rs112

Operating efficiencies to drive margin We expect pellet sales volume to increase during the quarter Margin to improve on QoQ basis owing to higher pellet sales and increase captive mining Things to watch: Commentary on resumption of iron ore mining; status on vizag ferro alloy expansion Valuation: At the CMP, the stock trades at 2.7x F14e earnings. On EV/EBITDA, it trades at 4.6x F14e EBITDA. We expect steel segment to continue to report strong performance on back of operating efficiency and higher captive coal consumption will help company to sustain its margin going forward. We valued company on 5x one year forward EBITDA (5.5x earlier) due to lack of volume growth, hence downgrade stock to Hold; with revised target price of Rs112.

NMDC

BUY | Rs165

Valuation attractive, pricing of iron ore a key We expect iron ore sales volume to increase to 6.5MT (5.3 MT in 3QF13) which will largely offset decline in iron ore realisation Margin to decline QoQ due to ~8% decline in blended realisation to Rs3,455/T (Rs3,827/T in 3QF13) Things to watch: Production guidance for F14; view on iron ore pricing in coming months Valuation: At CMP, stock trades at 7.9x F14e earnings and 3.4x F14e EV/EBITDA, which we believe its inexpensive compared to its global peers who trade at 5.5x on year forward EV/EBITDA. However, near term pressure on iron ore pricing remains as key overhang. We believe post the Shah Commission report on Odisha iron ore mining activities, iron ore supply is likely to remain under constrained, which in our view will benefit NMDC. Maintain BUY.

jatin.damania@sbicapsec.com

April 15, 2013 | 4

Metals & Mining 4QF13 Preview

SBICAP Securities Ltd

GMDC

BUY | Rs221

Efficiencies to improve We expect ~14% YoY fall in saleable lignite volumes We expect realisation also to be under pressure. Year end cost to add pressure Things to watch: New mine commissioning; investment in non-core activities Valuation: At CMP, stock trades at 7.1x F14e earnings and 4.6x F14e EBITDA. We continue to value the stock on the EV/EBITDA methodology and are valuing GMDC at 6.5x F14e EV/EBITDA. Maintain BUY.

Coal India

HOLD | Rs350

Go for Coal We expect ~8% QoQ increase in saleable coal volume to 129.97MT We expect incentives of Rs9bn to be accrued during the quarter Things to watch: Guidance on projects under consideration; announcement of price increase to pass on hike in cost; update on PPP projects; roadmap of different subsidiary to achieve desired target of 492MT Valuation: At CMP, stock trades at 11.5x F14e earnings and 7.2x F14e EV/EBITDA (including OBR). With the comfort on volume growth and expected price increase to pass on diesel price increase, we maintain HOLD rating on the stock. Upcoming OFS, remains a key overhang on the stock.

MOIL

HOLD | Rs286

Valuation and cash balance provides support We expect ~8% QoQ increase in saleable coal volume to 129.97MT We expect incentives of Rs9bn to be accrued during the quarter Things to watch: Status on expansion plan; update on utilization of cash as company was intend to venture into coal mining; view on manganese ore pricing Valuation: At CMP, stock trades at 8.6x F14e earnings and 2.2x F14e EV/EBITDA. Owing to strong business model and robust margin, company is likely to generate strong cash flows in coming years. Maintain HOLD.
Valuation Summary EPS (Rs) Company Tata Steel JSW Steel Hindustan Zinc Hindalco NALCO Godawari Power & Ispat Sarda Energy & Minerals Rating Hold Hold Buy Buy Hold Buy Hold Target Price 336 710 140 120 38 109 112 F13e 8.0 39.9 15.1 12.9 1.8 38.6 37.1 F14e 27.1 59.3 15.1 14.3 3.0 43.4 37.6 P/E(x) F13e 38.4 16.6 16.7 7.1 18.4 2.1 2.8 F14e 11.3 11.2 16.7 6.4 11.1 1.9 2.7 EV/EBITDA(x) F13e 6.7 5.1 4.5 7.1 6.4 3.3 5.1 F14e 5.4 5.3 3.5 6.6 3.7 3.2 4.6 RoE (%) F13e 1.8 4.9 19.8 7.2 3.9 17.7 13.7 F14e 5.7 6.8 17.2 7.5 6.2 15.8 12.5 RoCE (%) F13e 4.6 10.3 19.9 5.2 5.2 16.1 8.9 F14e 6.0 9.6 17.3 5.6 8.4 15.3 9.1

NMDC GMDC Coal India MOIL Source: SSLe

Buy Buy Hold Hold

165 221 350 289

15.8 18.9 26.1 25.7

15.8 22.0 26.8 26.2

7.9 8.2 11.8 8.7

7.9 7.1 11.5 8.6

3.6 5.5 7.5 2.8

3.4 4.6 7.2 2.2

21.8 26.3 35.8 15.5

19.2 24.7 33.8 14.1

21.8 33.2 32.6 16.0

19.1 35.5 30.6 14.1

Mining industry is jointly tracked with Milind Raginwar: Ph: 022 4227 3362; email: Milind.raginwar@sbicapsec.om

jatin.damania@sbicapsec.com

April 15, 2013 | 5

Metals & Mining 4QF13 Preview

SBICAP Securities Ltd

SBICAP Securities Limited

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KEY TO INVESTMENT RATINGS (w.e.f. February 2013)

Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then 10 percentage points) DISCLAIMER
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Metals & Mining 4QF13 Preview

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