KSL - Metals Mining Sector Update Jul 12 10

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Metals & Mining July 12, 2010

K S L - S e c t o r U d a t e

For private circulation only. Please read the Important Disclosure at the end of the report.KSL Intelligent Research Reports can be accessed on: www.bloomberg.net (KHDS<GO>), www.thomsonreuters.com, www.capitaliq.com,

www.themarkets.com, www.kslindia.com, www.moneycontrol.com, www.securities.com, www.valuenotes.comThis report is intellectual property of Khandwala Securities Ltd; queries on this report may be directed to Head of Research at [email protected]

Ferrous Metal UpdateSteel Prices Correct due to Excess Re-stocking and China Tightening

As stated in the past, re-stocking and de-stocking has an similar effect on steel prices as demand-supplyequation does. We highlighted in our previous report that there would be re-stocking cycle from thebeginning of Feb’10 due to expectation of higher steel prices on back of burgeoning raw material prices. Thiswas expected to keep the prices firm till May’10. However, re-stocking quantum proved to be higher thandemand, which coupled with China tightening and Eurozone crisis resulted in steady price decline from Mayonwards.

Chinese Imports in India is Rising Steadily

Apart from declining global steel prices, steel companies are also reeling under pressure from Chineseimports, which have made strong inroads in India in past couple of months. To put into perspective, Chinesenet exports to India stood at 5.6 lac tonne in the month of May’10 compared to 10.90 lac tonne for the entireCY09. The current month import of steel stands at over 10% of total steel production in the month of May’10.

The case of putting anti-dumping duty on Chinese steel has been gaining momentum after looking at recentimport numbers.

Raw Material Prices Increased During the Quarter, Likely to Decline in Next Quarter

After moving to quarterly contracts, iron ore mining company (Vale) is moving to index based pricing, wherelast quarter average would serve as a benchmark for next quarter pricing. This would result in higher pricesfor iron ore during 2QFY11, however, prices are likely to drop for next quarter considering decline in last twomonths. Coking coal companies have agreed for 12.5% hike for Jul-Sep quarter compared to last quarter,however, coking coal prices are also likely to marginally drop in the next quarter. Apart from these two majorraw materials, zinc, aluminium, ferro alloy and scrap prices have also been on subdued trend for last twomonths.

Outlook Seems Subdued for Current Quarter, Improvement from CY11 Likely

Steel prices are expected to remain subdued during current quarter on back of monsoon and subdued globalprices; however, prices would stabilize in the fourth quarter of CY10. We expect the fear of sovereign crisis tofade in the next couple of months, while Chinese tightening is also expected to get moderate on back ofsluggish global economy and currency appreciation. These factors would enable steady rebound in steelprices post CY10 in Indian market, while prices may remain stable in other developed countries.

Valuation Aggregates

P/E EV/EBITDA CMP Target (INR) % Gain Recom.

Companies FY10 FY11E FY12E FY10 FY11E FY12E (INR) Earlier Now (Loss) JSW Steel 12.7 19.0 6.5 8.0 8.5 4.5 1,082 1,300 1,197 10.7 ADDSAIL 11.9 13.9 10.6 7.4 8.6 6.9 194 274 236 21.6 BUYTata Steel -21.9 8.4 5.6 10.0 5.8 4.4 496 769 652 31.5 BUY

Analyst: Giriraj Daga Email: [email protected]



Khandwala Securities Limited

KSL – Metals & Mining Sector Update

July 12, 2010

2

JSW Steel Limited RatingsLTP 1,096 Recommendation ADDTarget 1,197 Risk HIGH

Bloomberg Consensus(BUY/HOLD/SELL) 31 / 6 / 7

Sensex Nifty BSE Metals17,834 5,352 14,838

CodesBSE NSE Bloomberg Reuters

500228 JSWSTEEL JSTL IN JSTL.BO

Sensex JSW Steel52 Wk: Hi/Lo 18,048/10,716 1,350/475Life High 21,207-Jan 08 1,389-Dec 07P/E 21.23 10.32P/BV 3.40 2.16Dividend Yield (%) 1.17 0.88Mkt Cap (INR Mn) 64,391,147 202,332Equity (INR Mn) - 1,871* - TTM standalone basis Capitaline

Share Holding Pattern % Mar-10 Jun-10Foreign 37.93 34.84Institutions 5.11 6.12Government 0.66 0.66Corporate 3.39 5.12Promoters 45.00 44.99

Public & Others 7.91 8.27

Returns % Abs Relative to Perf Sensex BSE Metals

1 Month 3.93 -1.45 0.903 Months -11.27 -11.16 7.661 Year 111.40 79.34 64.75

Relative Price Performance

40

100

160

220

280

Jul-09 Jan-10 Jul-10

JSW Steel Sensex

Steel Prices Revised DownwardAfter recent correction in steel prices, we have revised ourFY11 and FY12 steel price assumption downward by 4% and3% respectively.Volume Adjusted Marginally to Factor Current TrendOur production and volume estimates has been marginallydowngraded by 0.9% and 0.7% for FY11 considering currentquarter production.Raw Material Prices Moved Marginally DownwardWe have also revised raw material price assumption afterfactoring latest coking coal price contract and recentmovement in aluminium and zinc prices. These factors haveresulted in 0.4% and 2.9% decrease in blended cost per tonne

for FY11 and FY12 respectively.Change in Earning EstimatesModest decline in realization coupled with marginal drop inraw material cost has resulted in sizeable downward revisionin earning estimates.

Descriptions Earlier New %

Assumption Assumption Change

FY11 FY12 FY11 FY12 FY11 FY12

Sales Volume (MT)

Steel 6.71 7.92 6.67 7.92 -0.7 0.0

Parameter (INR/Tonne)

Realization 38,289 39,508 36,754 38,311 -4.0 -3.0

Cost 30,849 29,808 30,741 28,932 -0.4 -2.9

EBITDA 7,440 9,700 6,013 9,379 -19.2 -3.3

Financials (INR Mn)

Net Sales 269,841 332,057 258,281 323,235 -4.3 -2.7

EBITDA 50,723 78,975 40,877 76,498 -19.4 -3.1

PAT 17,084 34,538 10,635 32,854 -37.7 -4.9

Valuation JSW is trading at a P/E multiple of 19.0x and 6.5x FY11 andFY12 respectively, while EV/EBITDA multiple stood at 8.5x

and 4.5x for same period. Our target price has been reviseddownward from Rs 1,300/share to Rs 1,197/share and as thestock is offering 10% upside from CMP, we change ourrecommendation from ‘BUY’ to ‘ADD’.Financial Summary

(INR Mn) FY2008 FY2009 FY2010 FY2011E FY2012E

Net Sales 131,924 159,775 189,572 258,281 323,235EBITDA 35,928 32,483 41,658 40,877 76,498PAT 17,309 2,749 15,976 10,635 32,854EPS (INR) 92.5 14.7 85.4 56.9 166.9




KSL – Metals & Mining Sector Update

July 08, 2010

3

Steel Authority of India Limited (SAIL)RatingsLTP 198 Recommendation BUY

Target 236 Risk HIGH




500113 SAIL SAIL IB SAIL.BO

Sensex SAIL52 Wk: Hi/Lo 18,048/10,716 259/139Life High 21,207-Jan 08 293-Dec 07P/E 21.23 11.83P/BV 3.40 2.40Dividend Yield (%) 1.17 1.34Mkt Cap (INR Mn) 64,391,147 801,711Equity (INR Mn) - 41,304* - TTM standalone basis Capitaline

Share Holding Pattern % Dec-09 Mar-10Foreign 4.47 4.54Institutions 7.58 7.47Corporate 0.36 0.40Promoters 85.82 85.82Public & Others 1.77 1.77


1 Month -1.87 -7.26 -4.913 Months -17.74 -17.63 1.191 Year 28.42 -3.64 -18.23


75

100

125

150

175


SAIL Sensex

Steel Prices Revised Downward

After recent correction in steel prices, we have revised ourFY11 and FY12 steel price assumption downward by 4% and3% respectively. Our expectation has built-in steady reboundin steel prices in the second half of FY11 and thereafter weexpect a modest rise of 4% during FY12.Raw Material Revised Marginally UpwardWe have also revised raw material prices marginally afterfactoring in latest coking coal price contract. We have alsorevised the other raw material prices like aluminium, ferroalloy and coke. These factors have resulted in 1% increase inblended cost per tonne for FY11 and FY12 respectively.

Change in Earning EstimatesModest decline in realization coupled with marginal drop inraw material cost has resulted in sizeable downward revisionin earning estimates.




Sales Volume (MT)

Steel 12.51 13.63 12.51 13.63 0.0 0.0


Realization 38,745 39,718 37,075 38,457 -4.3 -3.2

Cost 29,469 29,142 29,834 29,387 1.2 0.8EBITDA 9,275 10,576 7,242 9,070 -21.9 -14.2

Financials (INR Mn)

Net Sales 499,108 559,313 477,605 541,548 -4.3 -3.2

EBITDA 119,482 148,937 93,289 127,720 -21.9 -14.2

PAT 76,455 92,159 57,757 75,949 -24.5 -17.6

ValuationSAIL is trading at a P/E multiple of 13.9x and 10.6x FY11 andFY12 respectively, while EV/EBITDA multiple stood at 6.9xand 6.3x for same period. Our target price has been revised

downward from Rs 274/share to Rs 236/share, however, thestock is still offering 22% upside from CMP and therefore, weretain our ‘BUY’ recommendation.Financial Summary


Net Sales 402,159 442,084 418,897 477,605 541,548EBITDA 113,390 90,235 99,394 93,289 127,720PAT 75,369 61,748 67,500 57,757 75,949EPS (INR) 18.2 14.9 16.3 14.0 18.4




KSL – Metals & Mining Sector Update July 12, 2010 4

Tata Steel Limited RatingsLTP 503 Recommendation BUYTarget 652 Risk HIGH




500470 TATASTEEL TATA IN TISC.BO

Sensex TATA STEEL52 Wk: Hi/Lo 18,048/10,716 737/331Life High 21,207-Jan 08 970-Oct 07P/E 21.23 8.72P/BV 3.40 1.93Dividend Yield (%) 1.17 2.65Mkt Cap (INR Mn) 64,391,147 439,967Equity (INR Mn) - 8,872* - TTM standalone basis Capitaline

Share Holding Pattern % Dec-09 Mar-10Foreign 19.74 21.29Institutions 24.80 23.91Corporate 3.40 2.87Promoters 31.25 31.32Public & Others 20.81 20.60


1 Month 5.20 -0.19 2.163 Months -27.52 -27.41 -8.591 Year 40.53 8.48 -6.12


75

100

125

150

175

200


Tata Steel Sensex

Steel Prices Revised DownwardWe have revised our FY11 and FY12 steel price assumptiondownward by 4% and 3% respectively. Bearing in mind theprice movement in European region, we have also revised ourTata Steel Europe expectation downward by 2% and 3% forFY11 and FY12 respectively.Raw Material Revised Marginally UpwardWe have revised raw material prices marginally afterfactoring in latest iron ore and coking coal price contracts andmovement in ferro alloy, zinc and scrap prices. These factorshave resulted in 0.5% and 1.5% decrease in blended cost fordomestic operation for FY11 and FY12 respectively, whileoverseas subsidiaries has seen a rise of 1% and drop of 4% in

blended cost for the same period.Change in Earning EstimatesModest decline in realization coupled with marginal drop inraw material cost has resulted in sizeable downward revisionin earning estimates.




Domestic Volume (MT)

Steel 6.60 6.80 6.60 6.80 0.0 0.0


Realization 46,263 47,273 44,615 46,023 -3.6 -2.6

Cost 27,422 27,992 27,289 27,585 -0.5 -1.5

EBITDA 18,842 19,281 17,326 18,438 -8.0 -4.4

Con Financials (INR Mn)

Net Sales 1,141,420 1,170,507 1,142,998 1,162,570 0.1 -0.7

EBITDA 173,396 194,369 146,599 179,943 -15.5 -7.4

PAT 72,515 89,484 52,197 78,496 -28.0 -12.3

ValuationTata Steel is trading at a P/E multiple of 8.4x and 5.6x FY11and FY12 respectively, while EV/EBITDA multiple stood at

5.8x and 4.4x for same period. Our target price has beenrevised downward from Rs 769/share to Rs 652/share,however, the stock is still offering 31% upside from CMP andtherefore, we retain our ‘BUY’ recommendation.Financial Summary


Net Sales 1,310,908 1,457,046 1,017,578 1,142,998 1,162,570EBITDA 177,824 184,962 80,427 146,599 179,943PAT 123,500 40,728 -20,092 52,197 78,496EPS (INR) 169.0 55.7 -22.6 58.8 88.5




KSL – Metals & Mining Sector Update July 12, 2010

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Global HRC Prices Global Long Prices

After steady improvement from the beginning of FY10onwards, global HRC price have shown marginaldecline on back of China tightening.

Global long steel price decline has been heaviercompared to HRC due to delay in construction andinfrastructure rebound across the globe.

200

450

700

950

1,200

Jan-08 Apr-09 Jul-10

(USD/Tonne)

400

650

900

1,150


(USD/Tonne)

Source: Khandwala Research, Bloomberg Source: Khandwala Research, Bloomberg

Iron Ore Prices Coking Coal Prices

Iron ore prices have seen very sharp volatility in lastcouple of quarter with strong surge and correction inthe same magnitude.

Coking coal prices has not declined, however, it hasnot risen much in the past and currently quoting nearits long term average.

40

85

130

175

220


(USD/Tonne)

150

173

195

218

240

Apr-09 Nov-09 Jul-10

(USD/Tonne)

Source: Khandwala Research, Bloomberg Source: Khandwala Research, Bloomberg





6

Indian Flat Steel Prices Indian Long Steel Prices

After improving over 20% from Mar’10 level, steelprices have witnessed moderate correction due toglobal downward pressure.

Long steel prices have also seen a moderatecorrection as restocking exercise is over and industryis approaching monsoon season.

24,000

30,000

36,000

42,000

48,000


(INR/Tonne)

16,000

23,000

30,000

37,000

44,000


(INR/Tonne)

Source: Khandwala Research, Company Source: Khandwala Research, Company

India Steel Production India Net Exports/(Imports) of Iron & Steel toChina

India steel production has witnessed strong rise inpast quarter after remaining steady from the last 30months.

Imports from China have reached its highest level,which is creating significant pressure in the domesticmarket.

2

3

4

5

6

Jan-04 Mar-07 May-10

(MT)

-6

-4

-2

0

2

Jan-04 Mar-07 May-10

(Lac Tonne)

Source: Khandwala Research, Company Source: Khandwala Research, Company





7

Analyst Certification

Each of the analyst(s) named certify, with respect to the companies or securities they analyse that:(1) all the views expressed in this report accurately reflect his/her/their personal views about anyand all of the subject companies and securities; and (2) no part of his/her/their compensation was,is, or will be, directly or indirectly, related to the specific recommendations or views expressed inthis report.

KSL RatingsTarget Price refers to one year unless specified; LTP: Last Trading PriceBUY: Expected return >15%ADD: Expected return 0-15%REDUCE: Expected decline 0-15%SELL: Expected decline >15%

Company Risk is based on the systematic risk of the stock. (1-year Beta)HIGH: >1.2MEDIUM: 0.8-1.2LOW: < 0.8

Name Designation Sectors E-mail

EQUITY RESEARCH TEL. NO. +91 22 4076 7373 FAX +91 22 4076 7378

Ashok Jainani VP, Head Research Market Strategy [email protected]

Dipesh Mehta Sr. Research Analyst IT, Telecom [email protected]

Hatim K Broachwala Research Analyst BFSI [email protected]

Vinay Nair Research Analyst Energy [email protected]

Giriraj Daga Research Analyst Metals, Mining, Cement [email protected]

Kruti Shah Research Associate Economics [email protected]

Dinesh Bhatia Research Associate Technical Analysis [email protected] Bhatkhande Research Associate Publishing [email protected]

Lydia Rodrigues Research Executive Data Mining [email protected]




KSL – Metals & Mining Sector UpdateJuly 12 2010

8

I N D I A

Name Designation Sectors E-mail

INSTITUTIONAL DEALING TEL NO. +91 22 4076 7342-47/56 FAX NO. +91 22 4076 73 77-78 Biranchi Sahu Head Institutional Equity [email protected]

Gopi Doshi Senior Dealer Institutional Equity [email protected] Patwardhan Dealer Institutional Equity [email protected] Shah Dealer Institutional Equity [email protected] C Patel Dealer Institutional Equity [email protected]

PRIVATE CLIENT GROUP TEL NO. +91 22 4200 7300 FAX NO. +91 22 4200 7399

Subroto Duttaroy General Manager Equity & PMS [email protected]

BRANCH OFFICE (PUNE) TEL NO. +91 20 2567 1404/06 FAX NO. +91 20 2567 1405

Ajay G Laddha Vice President [email protected]

Head Office: Corporate Office: Branch Office: Khandwala Securities LimitedVikas Building, Ground Floor,Green Street, Fort,MUMBAI 400 023.Tel. No. +91 22 4076 7373Fax No. +91 22 4076 7377/78E-mail: [email protected]

TruMonee Financial Limited1st Floor, White House Annexe,White House, 91, Walkeshwar Road,Walkeshwar, MUMBAI – 400 006Tel No.: +91 22 4200 7300Fax No.: +91 22 4200 7399Email: [email protected]

Khandwala Securities LimitedC8/9, Dr. Herekar Park,Off. Bhandarkar Road,PUNE 411 004Tel. No. +91 20 2567 1404/06Fax. No. +91 20 2567 1405Email: [email protected]

Logon to www.kslindia.com www.trumonee.com

Short-term trading based on technical indicators is a risky and skill oriented practice, which may result into huge losses orprofits. It is not advisable to trade a stock if it reaches the target price first and then comes within recommended range. Targetprices are just indicative based on the various technical parameters. Actual stock prices may come nearer or breach those levels.Always follow stop losses to avoid larger losses.

Important Disclosure

The Research team of Khandwala Securities Limited (KSL) on behalf of itself has prepared the information given and opinionsexpressed in this report. The information contained has been obtained from sources believed to be reliable and in good faith, butwhich may not be verified independently. While utmost care has been taken in preparing the above report, KSL or its groupcompanies make no guarantee, representation or warranty, whether express or implied and accepts no responsibility or liability asto its accuracy or completeness of the data being provided. All investment information and opinion are subject to change withoutnotice. Also, not all customers may receive the material at the same time.This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buyor sell securities mentioned herein. KSL shall not be liable for any direct or indirect losses arising from the use thereof and theinvestors are expected to use the information contained herein at their own risk. KSL and its affiliates and / or their officers,directors and employees may own or have positions in any investment mentioned herein or any investment related thereto andfrom time to time add to or dispose of any such investment. KSL and its affiliates may act as market maker or have assumed anunderwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buythem from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services foror relating to those companies.The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their owninvestment decisions based on their specific investment objectives and financial position and using such independent advisors, asthey believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates,either directly or indirectly, may fall or rise against the interest of investors. The value of or income from any investment may beadversely affected by changes in the rates of currency exchange.This document is strictly meant for use by the recipient only. None of the material in this report shall be reproduced, resold or re-distributed in any manner whatsoever without the prior explicit written permission from KSL.

KSL - Metals Mining Sector Update Jul 12 10

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