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Top Picks Marred by slump in domestic demand due to covid-19 and higher share of exports
(having low margins), we expect EBITDA of our coverage universe to fall 55%
QoQ/60% YoY. Steel realisations are expected to fall Rs3500/t QoQ due to higher
Hindalco Industries (HNDL)
share of exports at 60% v/s 15% QoQ/YoY. While, strong push in exports helped
contain the fall in overall volumes to 25% QoQ/23% YoY at 9.6mnt. Hit by lower
Jindal Steel & Power (JSP)
realisations and volumes, EBITDA/t would likely to fall by 38% QoQ/47% YoY at
Rs4,970. However, we expect JSP to post strong set of earnings than its peers, led
by iron ore inventory benefit and better volumes.
-6.0
-10.0
-14.0
-18.0
-22.0
-26.0
Kamlesh Bagmar -30.0
May-17
May-18
May-19
May-20
Feb-18
Feb-20
Feb-19
Aug-17
Aug-18
Aug-19
Nov-17
Nov-18
Nov-19
kamleshbagmar@plindia.com | 91-22-66322237
Amit Khimesra
amitkhimesra@plindia.com | 91-22-66322244
July 9, 2020 1
Metals & Mining
560
(US$ / tonne)
540
520
500
480
460
May-20
Jun-19
Jun-20
Jan-20
Mar-20
Feb-20
Oct-19
Apr-20
Jul-19
Dec-19
Nov-19
Sep-19
Aug-19
Source: Bloomberg, PL
750
700
650
600
550
500
May-20
Jun-19
Jun-20
Jan-20
Mar-20
Feb-20
Oct-19
Apr-20
Jul-19
Nov-19
Dec-19
Sep-19
Aug-19
Source: Bloomberg, PL
530
510
490
470
450
Jun-19
Jan-20
May-20
Jun-20
Mar-20
Feb-20
Jul-19
Apr-20
Oct-19
Nov-19
Dec-19
Aug-19
Sep-19
Source: Bloomberg, PL
July 9, 2020 2
Metals & Mining
Average spot iron ore prices (CIF Indian origin Iron Ore (62% Fe) Export Prices (CIF) to China
China) rose 4% QoQ or US$4/t to
US$93/t due to reduced supplies from 135
Brazil owing to Covid-19 and heavy
rains. 125
(US$ / tonne)
115
105
95
85
75
May-20
Jun-19
Jan-20
Jun-20
Mar-20
Feb-20
Oct-19
Apr-20
Jul-19
Dec-19
Nov-19
Sep-19
Aug-19
Source: Bloomberg, PL
Average heavy steel scrap prices fell China Heavy Steel Scrap Prices
8% QoQ or US$30/t at US$346/t due
to production cuts by EAF based 410
producers and increased supply. 400
(US$ / tonne)
390
380
370
360
350
340
330
320
310
300
May-20
Jun-19
Jan-20
Jun-20
Mar-20
Feb-20
Oct-19
Apr-20
Jul-19
Dec-19
Nov-19
Sep-19
Aug-19
Source: Bloomberg, PL
300
200
100
-100
Jun-17
Jun-18
Jun-19
Jun-20
Jun-16
Mar-18
Mar-19
Mar-20
Mar-17
Sep-17
Dec-17
Sep-18
Dec-18
Sep-19
Dec-19
Sep-16
Dec-16
Source: Bloomberg, PL
July 9, 2020 3
Metals & Mining
Steel Volumes is expected to fall 25% QoQ in Q1FY21E on the back of lockdown and slump in demand
Steel Volume Growth QoQ (%) Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21E
Jindal Steel & Power -4.0 11.8 -4.5 19.7 -0.7 -2.0 12.8 -16.2 11.4
JSW Steel -9.2 3.4 -7.1 16.6 -12.6 -4.0 11.9 -8.2 -21.6
Steel Authority of India -12.5 6.2 -6.8 27.7 -21.4 -3.1 29.9 -9.3 -39.9
Tata Steel (Incl TATA Steel BSL) 26.1 13.1 -10.2 21.6 -18.0 4.5 16.0 -17.0 -26.2
Source: Company, PL
July 9, 2020 4
Metals & Mining
July 9, 2020 5
Metals & Mining
Tata steel (TATA) posted earnings above our estimates led by higher than
expected earnings in TATA Steel Europe (TSE). While, Indian operations
reported earnings in line with our expectation. Standalone EBITDA rose 10%
QoQ (↓26% YoY) at Rs36.5bn (PLe:Rs37.4bn). TSE posted EBITDA of
US$9mn (PLe: loss of 63mn) against loss of US$134mn/profit of +US$170mn
in Q3FY20/Q4FY19 due to lower RM cost.
JSW Steel (JSTL) earnings were below our estimates due to lower than
expected earnings in domestic subsidiaries and higher inter-company
eliminations. Domestic unitary EBITDA came in line with our estimates at
Rs8,700 (PLe:Rs8,500), up 45% QoQ/↓14% YoY.
JSP reported results ahead of our estimates led by higher margins in India and
Shadeed steel operations. EBITDA of Domestic steel/Shadeed/Jindal power
(JPL) rose 16%/93%/30% QoQ (+8%/+82%/25% YoY). EBITDA/t beat our
expectation by 15% at Rs12,100 (PLe:Rs10,510, up 44% QoQ/22% YoY) due
to higher than expected realisations. Due to lower costs and flat realisations,
JPL’s EBITDA rose 30% QoQ/+25% YoY at Rs3.3bn (PLe:Rs3.2bn).
Hindustan Zinc’s (HZ) earnings were in line with our estimates. EBITDA came
in at Rs19.6bn (PLe:Rs18.9bn), down 14% QoQ (down 20% YoY)
July 9, 2020 6
Metals & Mining
13,000
12,000
11,000
10,000
9,000
Rs/t
8,000
7,000
6,000
5,000
4,000
Q4FY17
Q2FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q1FY20
Q3FY20
Q1FY18
Q3FY18
Q4FY19
Q2FY20
Q4FY20
Source: Company, PL (Excluding SAIL, which is yet to report Q4FY20 result)
Management Commentary
Company Commentary
1) Hopeful to maintain FY20 sales volumes in FY21e 2) Utilisation rates of Indian plants improved to 80% from 50%
in Apr'20. While, TSE ops operating at 70% utilisations 3) Guided share of exports at ~50%/30% in
Q1FY20e/Q2FY20e 4) Company expects improvement of Rs1,000-1500/t QoQ in Q2 realisations due to increase in
TATA share of domestic volumes 5) Capex for FY21e curtailed sharply by 50% to Rs50bn; would revisit capex in H2FY20e
6) In discussions with UK Government for long term support 7) Targeting savings of €600mn in TSE from ongoing
transformation program 8) Profitability of Sukinda chromite mines would hit by 50% to Rs4-4.5bn in next two years
due to high premium bid in auction 9) Expects merger of TATA Steel BSL (Erstwhile Bhushan Steel) in FY21e.
1) Currently operating at 85% utilisation 2) Won four iron ore mines in Odisha under auction with approved capacity
of 29mnt 3) Will start production at two of the above mines by July’20 4) Will source 16mnt/7mnt iron ore from captive
mines in Odisha/Karnataka, equivalent to 72% of requirement 5) Calibrated capex with postponement of spending in
downstream facilities 6) Curtailed capex guidance for FY21e by 45% to Rs90bn (FY20:Rs102bn), includes capex of
Rs8bn on mines won in Odisha and Karnataka 7) Will spend Rs164bn over FY22e and FY23e 8) Rs75bn of debt
JSTL
scheduled for repayment in FY21e 9) Impending acquisition of BPSL would get delayed due to Covid-19 pandemic
10) Sees Net Debt/EBITDA peaked-out at current levels 11) Inventory increased by 100kt QoQ/225kt YoY in Q4 at
1.16mnt but started declining in May’20 12) Coking coal cost will be flat QoQ in Q1FY21e at US$141-142/t 13) Benefit
of USD25-30/t fall in coking coal prices would be visible Q2FY20e onwards 14) Targeting to reduce commercial
buying/fixed cost by 10-15% in FY21e
1) Standalone/Consolidated debt due for repayment stands at Rs16.3bn/Rs61bn in FY21e 2) will raise US$500-
700mn through bonds to repay the overseas debt 3) Availed moratorium on principal + interest liability of Rs22bn 4)
Capex guidance for FY21e at Rs6-8bn 5) Exported 450kt in the quarter till yesterday with diversified market mix 6)
200kt production loss on account of 40 days planned shutdown of Angul Blast Furnace (BF) in Q4FY20; BF currently
JSP producing 10ktpd (~3.6mtpa) 7) Awaiting clarity from Govt about incentives on coal gasification plant (JSP operates
1.8mnt gas based DRI plant at Angul) 8) JPL’s 43% of capacity operating in Apr-May'20 9) Expect signing of 420MW
of PPA by end of July’20 followed by supply of power from October’20 10) Due to slump in coal demand, JPL managed
to book coal till Aug'20 at zero premium 11) Seeing domestic steel EBITDA margins for Q1FY21e at Rs9,000/t and
Rs9000+ for FY21e
July 9, 2020 7
Metals & Mining
Company Commentary
1) Domestic Al demand declined 11%/6% YoY in Q4FY20/FY20 at 905kt/3720kt 2) Guided marginal drop of 1%/15kt
in AL sales volumes in FY21e at 1.19mnt 3) CU volumes would be flat YoY at 334kt 4) Realisations in AL exports
lower by Rs2,000-3,000/t over domestic volumes 5) Revival in domestic demand would help maintain AL
exports/domestic mix of 60:40 in FY21e 6) AL CoP to fall by 5% QoQ in Q1 due to fall in coal, caustic and carbon
prices 7) Coal sourcing mix for Q4FY20 stood at 60%/35%/2%/2% through Linkage/E-auction/Captive/Imports with
blended cost below Rs900/mn kcal 8) Hedged 36%/2% AL volumes at US$1,711/Rs1,70,640 and 35% of the currency
HNDL at Rs75.9 9) Reduced capex guidance for FY21e by 30% at Rs15bn 10) Expects Govt’s recent move to auction
composite auction of bauxite and coal mines, would take couple of years to kick off 11) Gradually increasing
production at Novelis’s auto sheet (1/5th of total volumes) plants in North America and Europe 12) Auto demand
remains strong in Asia 13) Beverage cans (2/3rd of volumes) remains strong across markets 14) Volumes of Specialty
(15% of volumes) segment is mixed bag as markets in North America and Europe were in lockdown and demand was
tepid in Asia and South America 15) Expect strong revival in Specialty product’s demand in North America and Europe
16) Demand growth in aerospace segment remains intact in medium term with strong order backlog
1) 25% of Global zinc supply impacted due to COVID-19. Expect global mined metal production to dip by 5% in CY20
due to manpower issues 2) Though not quantified, capex for FY21e will be lower than FY20 (earlier guided annual
capex of $250-300mn) 3) 34kt/5t of mined metal/silver production hit in Q4 due to lockdown 4) Ore grade improved
HZ by 72bps to 7.9% over H1FY20 end 5) Impacted by lockdown, domestic volume’s share contracted to 30% (v/s 74%
pre-COVID) in the past one month; expects to normalize by Jun'20 6) Fumer project at Chanderia to commence
production in May’20 7) Shaft at RA mine commissioned during the quarter, will enable mine to achieve produce
capacity of 5mnt (current 3.5mnt)
July 9, 2020 8
Metals & Mining
Valuation Summary
CMP Sales (Rs bn) EBITDA (Rs bn) PAT (Rs bn) EPS (Rs) EV/EBITA (x) PE (x)
Company Names Rating TP (Rs)
(Rs) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
Coal India HOLD 130 155 960.8 865.1 979.3 1,145.8 274.6 179.8 228.1 305.9 167.0 103.8 132.0 180.3 27.1 16.8 21.4 29.3 2.1 2.8 2.1 1.4 4.8 7.7 6.1 4.5
Hindalco Industries BUY 165 180 1,181.4 1,180.1 1,326.3 1,374.0 143.1 133.3 155.5 155.9 39.5 38.4 51.2 50.4 17.8 17.3 23.0 22.7 5.3 5.5 4.5 4.1 9.3 9.5 7.2 7.3
Hindustan Zinc Acc 193 195 185.6 163.8 206.0 223.5 88.5 72.3 91.7 92.1 68.1 49.1 66.4 70.2 16.1 11.6 15.7 16.6 6.8 7.4 5.0 3.9 12.0 16.6 12.3 11.6
Jindal Steel & Power BUY 164 180 370.0 355.7 396.6 405.6 78.5 76.9 84.4 88.0 -2.9 -5.9 1.0 6.4 -2.9 -5.8 1.0 6.3 5.9 6.5 5.5 4.9 -57.1 -28.2 167.9 26.0
JSW Steel Reduce 197 140 730.8 679.9 908.2 871.6 116.2 103.9 163.9 168.1 41.3 10.0 37.5 73.3 17.1 4.1 15.5 30.3 7.8 9.8 6.3 5.7 11.6 47.8 12.7 6.5
NMDC Acc 86 87 117.0 101.1 105.5 116.9 60.1 48.9 49.8 56.4 36.1 36.4 37.1 41.7 11.8 11.9 12.1 13.6 4.1 4.9 4.9 4.3 7.3 7.2 7.1 6.3
Steel Authority of India Reduce 37 25 599.0 564.2 704.1 738.2 28.3 27.3 81.8 89.9 -24.9 -29.1 5.5 11.1 -6.0 -7.1 1.3 2.7 22.3 24.2 8.4 7.5 -6.1 -5.2 27.5 13.7
Tata Steel Reduce 345 250 1,398.2 1,344.4 1,493.4 1,517.3 169.9 164.4 217.3 213.6 17.9 -5.9 29.9 26.3 15.6 -5.2 26.1 22.9 8.3 8.8 6.7 6.8 22.1 -66.4 13.2 15.0
Source: Company, PL
July 9, 2020 9
Metals & Mining
Analyst Coverage Universe
Sr. No. Company Name Rating TP (Rs) Share Price (Rs)
1 ACC BUY 1,430 1,307
2 Ambuja Cement BUY 210 196
3 Coal India Hold 155 142
4 Heidelberg Cement India Accumulate 185 180
5 Hindalco Industries BUY 175 146
6 Hindustan Zinc Accumulate 195 169
7 Jindal Steel & Power BUY 150 109
8 JK Lakshmi Cement BUY 350 281
9 JSW Steel Reduce 140 166
10 NMDC Accumulate 98 85
11 Shree Cement Hold 19,000 22,452
12 Steel Authority of India Reduce 25 28
13 Tata Steel Reduce 250 327
14 The Ramco Cements Hold 600 646
15 Ultratech Cement BUY 4,300 3,787
July 9, 2020 10
Metals & Mining
ANALYST CERTIFICATION
(Indian Clients)
We/I Mr. Kamlesh Bagmar- CA, Mr. Amit Khimesra- MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
the specific recommendation(s) or view(s) in this report.
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reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific
recommendation or views expressed in this research report.
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