India Non-Ferrous Metal Sector Looking For Relative Value: Upgrading Hindalco To Buy
Stocks reflect LME price uptrend — Our domestic non-ferrous metals universe has surged 82-155% YTD, outperforming the Sensex by 21-94% and most Asian mining stocks by 40-50%. The rally has been propelled by a surge in LME prices YTD – zinc 40%, copper 74% and lead 78%, with aluminium up only 10%.
Earnings upgraded 13-95% — We revise our earnings for FY10-11E on higher prices, updated volumes/costs and FX rates. FY10 estimates factor current LME price trends but some declines by end-FY10. FY11E prices should rise 3-6% yoy.
Difficult metal outlook — Higher zinc prices could lead to restarts and near-term weakness. Aluminium prices could be range bound on concerns of high inventory (4.2m tonnes). Higher copper TC/RC margins in FY10-11E (vs. FY09) help Indian smelters, but some benefit is lost due to lower by-product prices.
Hindalco upgraded to Buy (1M) — Our upgrade is based on: 1) Valuations look reasonable relative to history; 2) Aluminium has rallied the least and offers relatively less downside; 3) Its PAT is the most sensitive to price changes (higher indebtedness and relatively larger size); and 4) The worst is likely behind for Novelis. Our call on Hindalco is premised on aluminium price stability and continued preference for risk.
Maintain Sell (3M) on Nalco, Sterlite and Hindustan Zinc (HZL) — We maintain Sell on the other non-ferrous names as they: 1) now trade at the upper end of historical trading bands, 2) are no longer very cheap (9-19x FY10E PE) vs. global peers (14-18x CY09E PE), and 3) are discounting higher LME prices than currently justified. On target prices, HZL and Sterlite have least downside; Nalco's valuations look most stretched.
Sourced: Citi
Stocks reflect LME price uptrend — Our domestic non-ferrous metals universe has surged 82-155% YTD, outperforming the Sensex by 21-94% and most Asian mining stocks by 40-50%. The rally has been propelled by a surge in LME prices YTD – zinc 40%, copper 74% and lead 78%, with aluminium up only 10%.
Earnings upgraded 13-95% — We revise our earnings for FY10-11E on higher prices, updated volumes/costs and FX rates. FY10 estimates factor current LME price trends but some declines by end-FY10. FY11E prices should rise 3-6% yoy.
Difficult metal outlook — Higher zinc prices could lead to restarts and near-term weakness. Aluminium prices could be range bound on concerns of high inventory (4.2m tonnes). Higher copper TC/RC margins in FY10-11E (vs. FY09) help Indian smelters, but some benefit is lost due to lower by-product prices.
Hindalco upgraded to Buy (1M) — Our upgrade is based on: 1) Valuations look reasonable relative to history; 2) Aluminium has rallied the least and offers relatively less downside; 3) Its PAT is the most sensitive to price changes (higher indebtedness and relatively larger size); and 4) The worst is likely behind for Novelis. Our call on Hindalco is premised on aluminium price stability and continued preference for risk.
Maintain Sell (3M) on Nalco, Sterlite and Hindustan Zinc (HZL) — We maintain Sell on the other non-ferrous names as they: 1) now trade at the upper end of historical trading bands, 2) are no longer very cheap (9-19x FY10E PE) vs. global peers (14-18x CY09E PE), and 3) are discounting higher LME prices than currently justified. On target prices, HZL and Sterlite have least downside; Nalco's valuations look most stretched.
Sourced: Citi
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