A Catch at bottom of the cycle - Welcome to Microsec Catch at bottom of the cycle.pdf · “A CATCH AT BOTTOM OF THE CYCLE” ... factored in the challenges faced by the sector and

METALS & MINING UPDATE

“A CATCH AT BOTTOM OF THE CYCLE”

The Indian metal and mining sector were caught in the slowdown cycle led by deteriorating macroeconomic conditions, downturn in global economic growth led by China and Euro-zone and also due to capacity addition of some players, which led to excessive leveraging of their balance sheet. We believe the Indian economy is at the bottom of the cycle and with improving economic growth of China and the euro-zone, select Indian Metal & Mining Companies may generate better fundamentals going forward. The recent comments of US Fed coupled with other deteriorating macro factors like GDP falling to a decade low at 4.4% in Q1FY14, inflating current account deficit at 4.8% of GDP in FY13, inflation at six month high at 6.1% has led to ruthless fall in rupee against dollar which peaked at INR68.825/US$, and dragged down stock prices to almost 5-8 years low.

We believe amidst this scenario, specific stocks with strong visibility in fundamentals and other catalysts supporting the same (as discussed below), are likely to positively impact companies going forward. Also, the current valuations have factored in the challenges faced by the sector and need a re-look at the fallen prices. Hence, we have chosen seven stocks which are proficient of delivering better performance going forward. The key impetus for the stocks recommended a “BUY” is described below. We expect an annualized return of ~24% or more from the recommended stocks on aggregate basis in next 3 years. Coal India

New FSAs to improve productivity Existing and new Coal Washeries to improve coal quality and aid future growth Rake availability to improve in future, thus removing the logistic bottlenecks

GMDC

Uptick in volume to bring growth in revenue Lignite based power plant’s operational performance to improve and result in higher profitability Wind power plants continue to support profits; planning to expand it further by 250MW

Hindalco Utkal and Mahan Plants: A big bet for Hindalco to Raise Output on standalone basis Existing aluminum operations to benefit from Hirakud expansion and value addition Standalone Copper business (which contribute ~20-25% to total revenue) to gain from better TC/RC Novelis on expansion drive with focus on increased recycling content and automotive segments

MOIL

Abundant and high quality reserves Capacity expansion to drive volumes Value added production capacities to impact beyond FY15E

NMDC Substantial high quality Iron ore reserves; Mining Capacity to grow at a CAGR of 8.32% to 51MT over FY14-16E Value addition projects and huge capex to foster growth in revenue over FY14-16e High margins backed by Low Cost of Production Realizations to grow by 11% over FY14-16E to INR4900/tone

SAIL Aggressive volume growth due to new capacity additions to portray surge in revenue post FY14e; amid falling realizations Backward integration of iron ore; to help save margins to some extent Reduction in capex to improve cash flows and Inventory buildup due to weak demand to ease

Tata Steel Greenfield coupled with brown-field expansions to boost volume growth in Indian Operations Turnaround in Europe Operations to be the key trigger Management’s view of timely capex completion and de-leveraging the balance-sheet a positive move Tata Steel Odisha unit's phase-I to start operations in Q4FY14e

Analyst: Neha Majithia [email protected] +033 30512177

Microsec Research15th October, 2013

We recommend Coal India a “BUY”. Coal India is the single largest coal producer in the world, sitting on huge

reserves of 18,862.9MT, out of which 10,595.1MT are proved reserves and 8,267.8MT are probable reserves.

With robust growth in dispatches and better rake availability, new FSAs to improve productivity,

commissioning of new coal washeries, price hikes is expected to aid the future growth of the company.

Investment Highlight

Sector – Mining

New FSAs to improve productivity: According to the presidential directive given to Coal India for signing FSAs

for a total capacity of 78000MW during the remaining 12th five year plan, CIL has to supply 65% of the

contracted amount from domestic sources and another 15% through imports with pass‐on pricing model. The

supply of coal from domestic sources has been restricted to 65%, 65%, 67% and 75% during the 4 years and

the balance CIL may have to import coal and supply to the willing power plants on cost plus basis. We believe

that with the venture into new projects, better rake availability and capacity expansion, CIL is positioned well

to meet the supply target (which in return is expected to improve productivity) and avoid any meaningful

penalty. Notably, CIL has signed about 140 FSAs committing 80 per assured supply od coal to power stations

with a total capacity of about 60,000MW till date. The company has to sign total 173 FSAs for a capacity of

78,000 MW.

Existing and new Coal Washeries to improve coal quality and aid future growth: CIL operates 17 coal

washeries with a total capacity of 39.4MT, out of which 12 are coking coal washeries with a total capacity of

22.18MT, while 5 are non‐coking coal washeries with a total capacity of 17.22MT. CIL has decided to set 16

coal washeries in the 12th five year plan with the aim of making the coal more competitive in comparison to

imported coal. Of the 16 washeries, 8 would be set up in Bharat Coking Coal Limited (BCCL), Jharkhand, 4 in

Mahanadi Coalfields Ltd (MCL), Orissa, 3 in Central Coalfields Limited (CCL), Jharkhand and 1 in Eastern

Coalfields Limited (ECL) West Bengal. We believe that since not a single washery had been commissioned in

11th five year plan due to delays in securing environmental clearances and non‐availability of suitable land,

the company will speed up the procedure of setting up the washery. In 12th five year plan, CIL has finalized

contracts to set up 3 washeries and 2 more are in advanced stage to be concluded.

Rake availability to improve in future, thus removing the logistic bottlenecks: CIL which dispatches ~55% of

coal mainly through railway has witnessed significant improvement in availability of rakes/day from CY12,

which is expected to aid the company in solving the logistics bottlenecks. Rail rake availability has improved

steadily over the past couple of years on account of supply of higher wagons. CIL received 162 rakes/day in

FY11, 168 rakes/day in FY12 and jumped by 18.7 rakes/day in FY13 to 187 rakes/day. We expect a steady

increase in rake availability in the coming years, while the Indian Railways (IR) is also working on increasing

the efficiencies.

Analyst: Neha Majithia

[email protected]

+033‐30512177

Promoters

90.00%

FIIs

5.51%

Other

Institutions,

2.34%

Non‐

Institutions,

2.15%

Current Market Price (CMP) 296

52 Week High 375

52 Week Low 238

Market Cap (INR in Cr) 186964

Market Data

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Coal India Ltd Sensex

Coal India Ltd

BUY


52 Week High 375

52 Week Low 238


Market Data

Scrip ID Coal India Ltd

Scrip Code (NSE) COALINDIA

Scrip Code (BSE) 533278

Bloomberg Ticker COAL IN

Reuters Ticker COAL.BO

Industry Mining

Face Value ( INR per share) 10.00

Equity Share Capital ( INR in Cr) 6,316.36

Avg 3 years P/E (x) 15.61

Avg daily volume (Last 1 Year) 2,242,639

Beta Vs Sensex 0.81

Dividend Yield 4.91%

Stock Scan

Particulars FY09A FY10A FY11A FY12A FY13A FY14E FY15E

Net Sales 40811 53847 59192 74584 68303 72409 77619

Growth 17.9% 31.9% 9.9% 26.0% ‐8.4% 6.0% 7.2%

EBITDA 2433 10482 13164 15287 17995 19218 20861

EBITDA Margin 5.96% 19.47% 22.24% 20.50% 26.35% 26.54% 26.88%

Net Profit 2079 9622 10867 14788 17356 17503 19401

Net Profit Margin 5.09% 17.87% 18.36% 19.83% 25.41% 24.17% 25.00%

Net Profit Growth ‐60.36% 362.91% 12.94% 36.08% 17.37% 0.84% 10.84%

Adjusted EPS 3.3 15.2 17.2 23.4 27.5 27.6 30.1

Adjusted P/E(x) NA NA 20.17 14.65 11.24 10.34 9.46

BVPS 32.3 43.2 52.7 64.0 76.7 88.6 101.2

P/BV(x) NA NA 6.58 5.36 4.03 3.22 2.82

ROE 11.1% 40.4% 35.9% 40.1% 39.0% 32.7% 30.9%

EV/EBITDA(x) NA NA 9.57 6.87 6.73 6.11 5.63

Financial Performance of Coal India Ltd (All figures in INR Crores except % and per share data)

Source: Microsec Research, Company Data


CIL to invest INR25,400 crore during 12th five year plan

Coal India has planned to invest INR25,400 crore during 2012‐17 on its projects in addition to INR25,000

crore for acquisition of coal assets abroad and INR10,000 crore for development of coal blocks

in Mozambique. It has identified 126 projects with an estimated capacity of 438.04 MT to be taken up

during 12th Plan period. Of these 60 are envisaged to contribute about 88MT during the terminal year of

the 12th Five Year Plan (2016‐17). Of the 126 projects, project reports for 78 have already been formulated.

CIL has already sanctioned INR2294.79 crores for four projects with an estimated capacity of 12.5 MT.

Peer Comparison

Valuation

At the CMP of INR285, the stock is trading at P/E of 10.77x its TTM EPS of INR26.47 per share and

EV/EBITDA of 6.90x its TTM EBITDA of INR17,223 crore. Hence, the stock looks attractive at it forward P/E of

10.34x its FY14e EPS of INR27.6 per share and P/E of 9.46x its FY15e EPS of INR30.1 per share.

Key Risks

1. Lower than expected notified price hikes and decline in e‐auction coal sales due to price pooling

mechanism (if imposed).

2. Divestment of 5% by Government of India.

3. Restrictions imposed by regulators related to forest clearance and environmental safeguards.

4. Wage cost hikes that the company is unable to pass on to customers.

5. Change in policies /regulations governing the sector.

6. Others: land acquisition; ban on e‐auction coal; logistical constraints including rail transport

bottlenecks; restricted ability to raise coal prices; disruption of operations in politically unstable

areas, etc.

Mcap

(US$ in Mn) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Coal India Ltd 30007 4.75 26.3% 26.5% 26.9% 25.4% 24.2% 25.0% 4.0 3.2 2.8 11.2 10.3 9.5 39.0 32.7 30.9 6.7 6.1 5.6

China Shenhua Energy 10299 3.03 35.2% 34.5% 34.3% 19.5% 17.9% 17.0% 1.5 1.3 1.2 7.8 8.2 8.2 20.2 16.5 15.2 6.7 4.7 4.5

China Coal Energy 2515 0.61 20.2% 18.6% 19.0% 10.1% 6.8% 6.3% 0.6 0.5 0.5 5.7 8.8 8.9 10.4 6.4 6.0 7.9 7.5 6.8

Peabody Energy 4834 17.93 23.2% 14.7% 17.9% 6.9% 0.8% 2.1% 1.0 1.0 1.0 8.6 172.4 30.8 ‐11.3 1.6 3.0 6.9 9.7 7.2

CONSOL Energy 8792 38.42 17.1% 20.3% 25.4% 6.2% 1.5% 6.0% 26.0 106.7 26.2 26.0 106.7 26.2 10.3 1.8 7.6 11.3 11.3 8.0

Average 7.2 27.4 7.2 12.0 74.0 18.5 7.40 6.57 7.98 8.2 8.3 6.6

P/E ROE (%) EV/EBITDA

Global Peers

Note: For Global peers, FY13, FY14E and FY15e represent FY12, FY13e and FY14e.

PAT Margin P/BVParticulars (in US$ mn)

CMP ((in

US$)

EBITDA Margin



GMDC Ltd

BUY Sector – Mineral & Mining

Uptick in volume to bring growth in revenue: GMDC’s lignite mining volume which contributes a staggering

80% to the total revenue has been growing a CAGR of 7.25% over FY08‐12. However, the company’s lignite

volume declined by 3.88% on YoY basis in FY13 because of lower production form Tadkeshwar and Mata‐no‐

Madh mines which together contribute ~48% to the overall lignite production. (30% from Mata‐no‐Madh and

18% from Tadkeshwar mine). The lignite volume has fallen since last 4 quarters due to scarcity of land for

dumping of overburden waste and several mines encountering higher thickness stones resulting in lowering of

speed of mining. Despite this, we believe that the company’s capacity expansion via brownfield expansion at

Mata‐no‐Madh and Bhavnagar mine, is expected to add production capacities of 1MT and 2MT, respectively,

during FY2014e. Further, GMDC has got through regulatory hurdles for its upcoming Umarsar mine

(production capacity 1MT). We expect the mine to start production in 2HFY14e.

Lignite based power plant’s operational performance to improve and result in higher profitability: GMDC’s

250MW lignite based power plant at Nani Chher, which had been facing operational issues in past due to

lower PLF and higher fixed cost, has been outsourced to a Korean company, KEPCO at a fixed cost payout of

INR320mn PA till Aug’13 and thereafter payment will be performance based with PLF threshold of 75%. The

KEPCO team is currently controlling plant operations and running at PLF of 50‐55% and is expected to start

delivering the required PLF target of 75% from Aug’13. Also, GMDC has undertaken feasibility study for setting

up of additional 250MW lignite based power plant at Akrimota based on satisfactory performance from KEPCO

and lease grant of Akrimota mine in future (50 MT reserves). We believe that with the plant is likely to

achieve stabilization by FY14e; its PLF is also expected to rise to around 75%, thereby leading to gains for

GMDC in FY14e and FY15e.

Wind power plants continue to support profits; planning to expand it further by 250MW: Currently, wind

power capacity stands at 121 MW and another 29 MW (14 towers of 2.1MW each) is expected to be on‐

stream by H2FY14e end. 50 MW of capacity addition during FY14e is largely on track.


[email protected]

+033‐30512177

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GMDC Ltd Sensex

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FIIs

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We recommend GMDC a “BUY”. GMDC is the largest merchant miner of lignite in India, supplying lignite to

various industrial units, including textiles, chemicals, ceramics, bricks, and captive power plants. The

company operates 5 lignite mines in Gujarat. Apart from lignite, it also produces bauxite, fluorspar, and

manganese ore and operates a 250MW lignite‐based power plant. The company also operates a 150MW

wind power plant. With expected uptick in volume to bring growth in revenue, lignite based power plant’s

operational performance to improve and wind power business to support profits, GMDC is a safe play in the

mining sector.


52 Week High 222

52 Week Low 76


Market Data

Scrip ID GMDC Ltd

Scrip Code (NSE) GMDCLTD


Bloomberg Ticker GMDC.BO

Reuters Ticker GMDC IN

Industry Mining


Equity Share Capital ( INR in Cr) 63.60


Avg daily volume (Last 1 Year) 178,430

Beta Vs Sensex 0.62


Stock Scan


Net Sales 978 1065 1421 1631 1675 1686 2020

Growth ‐0.3% 9.0% 33.4% 14.7% 2.7% 0.7% 19.8%

EBITDA 455 473 651 760 947 801 963

EBITDA Margin 46.59% 44.37% 45.78% 46.59% 56.55% 47.51% 47.67%

Adj Net Profit 231 280 375 487 601 533 636

Adj Net Profit Margin 23.67% 26.27% 26.39% 29.85% 35.88% 31.61% 31.49%

Adj Net Profit Growth ‐12.32% 20.94% 34.01% 29.78% 23.44% ‐11.29% 19.32%

Adjusted EPS 8.8 11.8 15.3 18.9 18.9 16.6 19.8

Adjusted P/E(x) 4.60 11.91 8.95 9.64 8.77 5.96 5.00

BVPS 38.0 81.7 91.0 97.5 79.7 92.8 108.7

P/BV(x) 1.07 1.72 1.51 1.87 2.08 1.07 0.91

ROE 20.4% 20.17% 24.5% 26.2% 26.2% 19.5% 19.8%

EV/EBITDA(x) 3.28 8.93 6.37 6.88 5.59 3.83 3.18

Financial Performance of GMDC Ltd (All figures in INR Crores except % and per share data)



Logistics advantage backs pricing power, monopoly‐like status

GMDC has exhibited strong pricing power due to the prevalence of a robust demand scenario in the pro‐industry

state of Gujarat (realizations have grown at a 9.9% CAGR over FY2006‐12). Moreover, absence of any other merchant

miner in the state makes GMDC a virtual monopoly. For consumer industries in the state, purchasing coal from CIL (at

least 700 km away), or importing coal, stands to be expensive compared to purchasing lignite from GMDC. Also, a

decline in international coal prices has insignificant impact on GMDC’s lignite realizations as GMDC’s customers

mainly comprise of small to medium players whose boilers are designed to run on domestic lignite.

Valuation

At the CMP of INR99, the stock is trading at P/E of 5.73x its TTM EPS of INR17.26 per share and EV/EBITDA of 3.21x its

TTM EBITDA of INR963 crore. Hence, the stock looks attractive at its forward EV/EBITDA of 3.83x its FY14e EBITDA of

INR801 crore and EV/EBITDA of 3.18x its FY15e EBITDA of INR963 crore.

Key Risks

1. Delay in approvals: GMDC’s Bhavnagar and Mata‐no‐Madh brownfield expansions have been delayed over

the past one year. We expect the company to receive approvals during 2HFY2014e. A delay beyond

FY2014e in obtaining approvals can lead to muted growth in lignite volumes.

2. Delay in price hike: We expect GMDC to hike product prices during FY2014 in order to pass on cost

increases due to diesel price hike. However, in case the company does not (or delays) hike prices during

FY2014, it could pose a downside risk to our margin estimates.


Investment Highlights

Hindalco Industries Ltd

BUY Sector – Aluminium & Copper Products

Utkal and Mahan Plants: A big bet for Hindalco to Raise Output on standalone basis: Hindalco is expected

to produce ~3MTPA of alumina and 1MTPA of aluminium from 2014e, as production from the company’s

Mahan and Utkal Alumina is anticipated to come on‐stream. At present, it produces around 1.5MTPA of

alumina and around 0.6MTPA of aluminium. Mahan Aluminium smelter is under commissioning and trial

production has started. It has a smelter power plant complex, comprising of 356KTPA aluminium smelter and

900MW captive power plant. Moreover, it has access to Mahan coal block which has received stage‐I MOEF

clearance and is awaiting stage‐II clearance. Utkal Alumina project, in Odissa, is a 1.5MTPA refinery with

captive bauxite resources of 200MT. We believe output from Utkal would be sufficient to feed Alumina to

Mahan and Aditya smelter. In our view, the company is well integrated with all raw material availability in

place. We believe in long term, as these projects ramp up to their full potential, the company is expected to

witness an exponential growth in volumes and profitability.

Existing aluminum operations to benefit from Hirakud expansion and value addition: Hindalco has shifted

Novelis’ UK rogerstone FRP plant of 135KTPA to Hirakud with a capacity of 130KTPA and is expected to

commission during FY14e. The Hirakud FRP project will be the first and the only facility with a capability to

produce canbody stock in India. In addition, capacity expansion of 52KTPA at Hirakud is also expected to be

completed by H1FY15e, increasing the metal capacity to 213KTPA. We expect value added products share to

increase in the current overall standalone mix which will lend support to sales and margins going forward.

Standalone Copper business (which contribute ~20‐25% to total revenue) to gain from better TC/RC:

Volumes are expected to remain steady in Hindalco’s copper business (500KTPA capacity at Dahej, Gujarat)

but expectations of surplus concentrate in global markets will help in better TC/RC realizations which could

improve margins from current level. We expect TC/RC of $85‐90/tonne and $90‐95/tonne in CY13 and CY14

as compared to US$65/tonne in CY12. Copper operations get 15‐20% linkages for copper ore from Hindalco’s

51% subsidiary, Aditya Birla Minerals Ltd which has two copper mines (Nifty and Mt. Gordon) in Australia

with annual ore output of ~3MT (~60kt of contained copper).

Novelis on expansion drive with focus on increased recycling content and automotive segments: Novelis is

currently expanding its total capacity from 3MTPA to 4.1MTPA through setting up of new capacities and

undertaking de‐bottlenecking across its principal locations at a capex of ~US$1.5bn by FY16e. This includes

increasing rolling & finishing capacity by 890ktpa and raising its recycling capacity by ~855KTPA which will

increase the recycled content in Novelis products from 39% in CY12 to 50% by CY15e and finally to 80% by

CY20. The expansions are well spread out across operations and targeted mainly on high growth markets of

Asia and America with a focus on the automotive segment.


[email protected]

+033‐30512177

Promoters

32.06%

FIIs

26.53%

Other Institutions

15.59%

Non‐

Institutions 17.59%

Others8.24%

Hindalco Ltd is the largest aluminum producer in India. We recommend Hindalco Ind Ltd a “BUY” on back of

its coal linkage from Mahan coal block which will provide raw material to Mahan plant as this is expected to

lower down the cost of production, timely commission of Utkal and Mahan projects which would enhance

the standalone aluminium volume, marginal gains from copper business due to improved TC/RC, strong

volume and earnings on back of expansion in Novelis.

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Hindalco Ltd Sensex


52 Week High 137

52 Week Low 83


Market Data

Scrip ID Hindalco Ltd

Scrip Code (NSE) HINDALCO


Bloomberg Ticker HNDL IN

Reuters Ticker HALC.BO

Industry Aluminium & Copper Products





Beta Vs Sensex 1.37


Stock Scan


Net Sales 65963 60708 72202 80821 79706 87548 96344

Growth 9.9% ‐8.0% 18.9% 11.9% ‐1.4% 9.8% 10.0%

EBITDA 2789 8410 7797 7460 7712 8571 10293

EBITDA Margin 4.23% 13.85% 10.80% 9.23% 9.68% 9.79% 10.68%

Net Profit 484 3925 2456 3397 3027 2494 2796


Net Profit Growth ‐77.94% 711.23% ‐37.42% 38.29% ‐10.89% ‐17.61% 12.11%

Adjusted EPS 2.9 20.5 12.8 17.7 15.8 12.6 14.1

Adjusted P/E(x) 18.21 8.86 16.26 7.30 5.79 8.81 7.88

BVPS 92.7 112.6 151.2 163.4 184.5 190.0 202.7

P/BV(x) 0.56 1.61 1.38 0.79 0.50 0.58 0.55

ROE 2.1% 23.3% 11.4% 11.8% 9.0% 7.0% 7.2%

EV/EBITDA(x) 9.5 5.6 7.9 6.9 8.5 8.3 6.9

Financial Performance of Hindalco Ltd (All figures in INR Crores except % and per share data)



Novelis counting big on FIFA World cup and 2016 summer Olympics; to buck up the can

volumes:

Novelis, which supplies cans to the world’s biggest drinks‐can maker Rexam (REX) Plc, and to Coca‐Cola Co.

and Anheuser‐Busch InBev NV (ABI), is counting on next year’s soccer World Cup and the 2016 summer

Olympics in Brazil to buck up demand amid sagging sales at home in India. It has spent about $340 mn in the

South America to expand recycling and rolled aluminum capacities. It has started its new capacity in Brazil

last month. Management expects a surge in consumption and with football World Cup and the Olympics

coming consecutively. During the London Olympics in 2012, Coca‐Cola, the No. 1 beverage company, had

estimated it would serve 23 mn drinks over an eight‐week period, equivalent of about 338 tons of

aluminum if served in cans.

Peer Comparison

Valuation

At the CMP of INR111 per share, the stock is trading at EV/EBITDA of 8.3x its FY14e EBITDA of INR8571 crore

and EV/EBITDA of 6.9x its EBITDA of INR10293 crore. We believe that the net debt could touch its peak level

in FY14e due to its high capex which will be mostly done in this fiscal year. We are positive on Hindalco, as

the major projects commission; it is expected to improve the cash flows, release long standing CWIP and

deleverage the stretched balance sheet. We remain concrete on the timely commissioning of Mahan and

Utkal projects in H2FY14e. Hence, we recommend a “BUY” on Hindalco Ltd on back of its coal linkage from

Mahan coal block which will provide raw material to Mahan plant as this is expected to lower down the cost

of production, timely commission of utkal and Mahan projects which would enhance the aluminium

volume, marginal gains from copper business due to improved TC/RC, strong volume and earnings on back

of expansion.

Key Risks

Delays in project ramp up amid weak demand is likely to adversely impact EBITDA margins and

raise the cost of operations, thus, adversely impacting profitability.

Any correction in the LME prices of aluminium is likely to adversely impact the standalone EBITDA.

Lower shipments from Novelis and slowdown in expansion.

Mcap


Hindalco Ltd 3446 1.80 9.7% 9.8% 10.7% 3.8% 2.8% 2.9% 0.5 0.6 0.5 6.2 8.8 7.9 9.00 7.00 7.20 8.51 8.31 6.92

NALCO Ltd 1366 0.53 15.8% 12.7% 12.9% 8.7% 8.4% 8.6% 13.3 14.3 13.6 0.6 0.7 0.7 5.01 4.97 5.36 3.49 4.14 3.70

Average 12.7% 11.2% 11.8% 6.3% 5.6% 5.7% 6.9 7.5 7.1 3.4 4.7 4.3 7.01 5.98 6.28 6.00 6.23 5.31

United Co RUSSAL Plc 4506 0.30 11.2% 8.6% 90.9% 2.5% 1.3% 4.4% 0.42 0.42 0.41 30.00 37.50 8.82 ‐3.14 1.12 4.11 16.72 16.80 15.91

Alcoa Plc 9038 8.45 8.5% 11.1% 11.4% 1.1% 1.3% 2.0% 0.69 0.70 0.69 35.21 18.37 19.74 1.40 2.11 2.98 8.51 7.65 7.33

Vedanta Resources Plc 4380 16.46 34.4% 34.4% 33.4% 2.4% 1.7% 2.6% 12.37 20.57 11.51 12.37 20.57 11.51 3.48 5.48 9.88 5.29 5.89 4.95

Average 15.4% 14.6% 28.5% 4.1% 3.5% 4.4% 4.5 7.2 4.2 25.9 25.5 13.4 0.58 2.90 5.66 10.2 10.1 9.4

Global Peers

Domestic Peers

Particulars (in US$ mn)


EV/EBITDACMP (in

US$)

EBITDA Margin PAT Margin P/BV P/E ROE (%)



MOIL Ltd

BUY Sector – Mining

Abundant and high quality reserves: MOIL is the 5th largest producer of manganese ore and the

largest player in manganese industry in India. It has 10 mines, of which 6 mines are located in

Nagpur and Bhandara districts of Maharashtra and 4 are located in the Balaghat district of Madhya

Pradesh. Around 7 mines of the company are underground, while the rest are opencast. The

company has 73.5MT of reserves and 22.05MT of proven and probable reserves. Production from

the underground mines makes up roughly 62‐65% of the total production. Balaghat mine in

Madhya Pradesh and Chikla mine in Maharashtra are the major underground mines, whereas

Dongri Buzurg in Bhandara district of Maharashtra accounts for bulk of the production from

opencast mines.

Capacity expansion to drive volumes: MOIL has various capacity expansion plans under

development which is expected to complete post 2014. We believe MOIL’s production to rise to

1.15MT in FY14e on account of increased production from Balaghat mines. According to the initial

expansion plans, FY15e is anticipated to see two projects getting completed. MOIL expects to

incur a capex of INR200 crore and INR400 crore in FY14e and FY15e, respectively. It expects

Manganese ore volume of 1.15MT and 1.2MT in FY14e and FY15e, respectively.

Value added production capacities to impact beyond FY15e:

In addition to the expansion plans for its mines, MOIL has two Joint Ventures planned with SAIL

and RINL to improve business volume and profitability. The company will produce a total of

163,000TPA of ferro‐alloys to cater to the steel requirements of SAIL and RINL. MOIL is expected

to increase its ferro‐manganese capacity by 51,000TPA and add silico‐manganese capacity of

112,000TPA. The total capex for the two projects is pegged at INR608 crore.

Strong balance Sheet and zero‐debt Company: MOIL over the years has a strong balance sheet

with huge cash reserves. The company had cash reserves of INR2277 crore (63% of current market

cap) at the end of FY13.

We recommend MOIL Ltd a “BUY”. MOIL is the largest producer of manganese ore by volume

(~50% of India’s production) in India with a capacity of 1.1MT and reserves of 22MT (constituting

16% of India’s manganese reserves). Currently, the stock trades at P/E of 8.x its TTM EPS of

INR26.45 per share and EV/EBITDA of 2.94x its TTM EBITDA of INR448.87 crore. Hence, with the

volumes to improve and manganese ore prices firming up steadily, value added production to

commence in FY15e; MOIL is well place to outperform.

Promoters 80.00%

FIIs6.06%

Other Institutions3.00%

Non‐Institutions10.94%


[email protected]

+033‐30512177


52 Week High 275

52 Week Low 182


Market Data

Scrip ID MOIL Ltd

Scrip Code (NSE) MOIL


Bloomberg Ticker MOIL IN

Reuters Ticker MOIL.BO

Industry Mining & Minerals




Avg daily volume (Last 1 Year) 51,674

Beta Vs Sensex 0.82


Stock Scan

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MOIL Ltd Sensex


Net Sales 1282 969 1140 900 967 967 1022

Growth ‐97.9% ‐24.4% 17.6% ‐21.1% 7.5% 0.0% 5.7%

EBITDA 908 604 767 433 435 421 444

EBITDA Margin 70.85% 62.26% 67.30% 48.16% 44.93% 43.54% 43.44%

Net Profit 664 466 588 411 432 420 435


Net Profit Growth 38.34% ‐29.74% 26.10% ‐30.15% 5.10% ‐2.71% 3.57%

Adjusted EPS 39.5 27.8 35.0 24.5 25.7 25.6 26.7

Adjusted P/E(x) NA NA 11.64 10.25 8.64 8.37 8.01

BVPS 78.6 99.8 126.7 145.3 164.6 183.7 203.4

P/BV(x) NA NA 3.22 1.72 1.35 1.16 1.05

ROE 62.2% 31.1% 30.9% 18.0% 16.6% 14.6% 13.9%

EV/EBITDA(x) ‐1.17 ‐1.80 5.20 3.33 3.36 3.18 3.02


Financial Performance of MOIL Ltd (All figures in INR Crores except % and per share data)


Adding value‐added capacity through JVs

Currently, MOIL has beneficiation plants of 0.4MT at Dongri Buzurg mine and of 0.5MT at

Balaghat mine to upgrade the quality of ore produced. MOIL intends to expand its value‐added

capacity and, thus, has entered into JVs with SAIL and Rashtriya Ispat Nigam Ltd (RINL) to set up

two ferro alloy plants in Chhattisgarh and Andhra Pradesh. The proposed installed capacity in

case of the JV with SAIL is 1,06,000 tonne and that in case of RINL is 57,500 tonne.

Sales volumes to increase post FY2014e

MOIL has started expanding its existing mines to augment its production capacity to 1.5MT by

FY16e from 1.2MT in FY2013. Although, the company expects flat sales volumes during FY2014e,

it expects higher volume growth from FY2015e.

Valuation

After a steep decline in manganese ore prices over the past two years, MOIL’s realizations have

increased during the past two quarters. Going forward, we do not foresee any meaningful

downside in manganese ore prices over the coming couple of years, especially considering the

INR depreciation against the USD. Although, we estimate MOIL’s sales volumes to increase

modestly during FY2013‐15, we believe the valuations are attractive at 2.94x FY2015e

EV/EBITDA.

MOIL has corrected by 19% YTD and has also halved over the last two years. The sharp

underperformance has largely been due to depressed manganese ore prices and the company’s

inability to raise production. Manganese ore production has been stagnant over the last two

years as the company was unable to speed up its capex plans. However, with the completion of

the drilling at Gumgaon and Balaghat, we expect production to increase marginally over the next

three years.

Currently, the stock trades at P/E of 8.09x its TTM EPS of INR26.45 per share and EV/EBITDA of

2.94x its TTM EBITDA of INR448.87 crore. At the CMP of INR214 per share, the stock trades at

P/E of 8.37x its FY14e EPS of 25.6 and P/E of 8.01x its FY15e EPS of 26.7. On EV/EBITDA basis, the

stock is trading at 3.18x its FY14e EBITDA of INR421 crore and 3.02x its EBITDA of INR444 crore.

Hence, with the volumes to improve and manganese ore prices firming up steadily, value added

production to commence in FY15e; MOIL is well place to outperform.

Key Risks

Lower manganese ore volumes, reserves and prices

Expensively priced acquisitions

New MMDR Bill which can put Margins Under Pressure

Hike in royalty rates which are due for revision in MMDR Bill



NMDC Ltd

STRONG BUY Sector – Mineral & Mining

Substantial high quality Iron ore reserves; Mining Capacity to grow at a CAGR of 8.32% to 51MT over FY14‐

16e: NMDC is India's single largest iron ore producer, with an annual production capacity of 32 million tonnes

per annum (MTPA) and total reserves of 1354.64 million tonnes (MT). The production capacity is expected to

reach 51MTPA by FY16e with opening of two new mines in Chattisgarh and Karnataka with mining capacity of

7MTPA each and expansion in existing mines of 2MTPA. In addition, it possesses the world’s best quality iron

ore with Fe content of greater than 64%. Hence, capacity addition would lead to higher volumes, thus, adding

growth significantly to the topline and the bottomline as well.

Value addition projects and huge capex to foster growth in revenue over FY14‐16e: Besides its mining

activities in Iron ore, NMDC has forayed into pelletization and steel manufacturing by setting up one steel

plant in Chattisgarh and 2 in Karnataka. It has also planned to start producing coal from its 2 captive mines in

Madhya Pradesh to feed these steel plants. It has spent a total capex of INR 35410.67 crores for setting up 3

steel plants and INR1513.42 crores for the pellet plants. We expect these projects to add value FY15e

onwards.

High margins backed by Low Cost of Production: NMDC is one of the low cost producers of Iron Ore in the

World, with an average cost of production of US$21/tonne in FY13. NMDC’s low cost production is due to its

highly mechanized mines i.e. open cast mines, low mining cost on account of its high grade iron ore reserves

with Fe content of more than 64% and economical/inexpensive labour. In addition to this, NMDC’s mines

which are located in Chattisgarh and Karnataka, allows it to take the benefit from scale of operations and has

the access to efficient logistics, which in return saves the company’s cost. Currently, the EBITDA Margin of

NMDC is ~69% as compared to the average EBITDA Margin of ~39% of its international players and ~45% of

its only domestic iron ore player ‐ Sesa Goa (now Sesa Sterlite).

Realizations to grow by 11% over FY14‐16E to INR4900/tonne: NMDC’s realizations are expected to improve

due to its shift to import parity price mechanism from net back pricing mechanism to match the international

benchmarked iron ore prices. So far, NMDC’s domestic iron ore prices were at more than 100% discount to

the international benchmark prices.


[email protected]

+033‐30512177

We recommend NMDC a “STRONG BUY”. NMDC is India's largest iron ore producer and exporter, presently

producing about 27MT of iron ore from its 3 fully mechanized mines viz., Bailadila Deposit‐14/11C, Bailadila

Deposit‐5, 10/11A (Chhattisgarh State) and Donimalai Iron Ore Mines in Karnataka. With ~40% market share

in the iron ore producing industry, substantial high quality iron ore reserves, addition and expansion of mines

leading to higher volume growth, superior margins backed by low cost of production, foray into value added

projects and improved realization in future, NMDC IS likely to grow at a CAGR of 8.69% in terms of revenue

and 6.32% in terms of PAT over FY14‐16e.

Promotes

80.00%

FIIs4.79%

Other Institutions

11.49%

Non‐Institutions

3.72%


52 Week High 201

52 Week Low 93


Market Data

Scrip ID NMDC Ltd

Scrip Code (NSE) NMDC


Bloomberg Ticker NMDC.BO

Reuters Ticker NMDC IN

Industry Mining & Minerals





Beta Vs Sensex 0.95


Stock Scan


Net Sales 7691 6230 11369 11262 10699 10641 11627

Growth ‐87.2% ‐19.0% 82.5% ‐0.9% ‐5.0% ‐0.5% 9.3%

EBITDA 5838 4402 8645 8926 7380 6902 7388

EBITDA Margin 75.90% 70.67% 76.04% 79.26% 68.98% 64.86% 63.54%

Net Profit 4372 3447 6498 7266 6342 6013 6288


Net Profit Growth 34.49% ‐21.16% 88.50% 11.81% ‐12.71% ‐5.19% 4.57%

Adjusted EPS 11.0 8.7 16.4 18.3 16.0 15.3 16.0

Adjusted P/E(x) 14.21 33.83 17.29 8.79 8.60 8.52 8.13

BVPS 29.4 36.0 48.5 61.6 69.4 77.2 85.2

P/BV(x) 5.34 8.17 5.85 2.62 1.98 1.68 1.53

ROE 37.6% 24.2% 33.8% 29.8% 24.4% 20.6% 19.3%

EV/EBITDA(x) 7.79 19.65 9.67 3.99 4.52 4.35 4.06

Financial Performance of NMDC Ltd (All figures in INR Crores except % and per share data)


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NMDC Ltd Sensex


Zero debt in books, Strong Cash Balance to help company grow in future

NMDC has a strong balance sheet with zero debt and cash balance of ~INR21,026 crore. Cash balance has

grown by 2.9x over FY08‐13. Despite the company’s total capex of INR35,410.67 crores being spent on

setting up 3 steel plants and INR1513.42 crores on the pellet plants, it has been able to remain a cash rich

company. Hence, with management’s plan to spent capex of ~INR30,000 crore in the 12th five year plan, we

expect NMDC’s cash balance to grow by 2.2x by FY16e. NMDC’s ROE has improved from 24.15% to 29.77%

from FY10 to FY12 due to an increase in realizations. We estimate NMDC’s ROE to decline to 23.26% over

FY13‐16E, as the steel ventures are expected to be 100% funded through internal sources and the returns

will reflect only after FY16‐17e.

Peer Comparison

NMDC stands on the top possessing the highest EBITDA Margin and PAT Margin among its domestic as well

as international players. EBITDA Margin of NMDC is ~69% as compared to the average EBITDA Margin of

~39% of its international players. Also, it possesses the highest EBITDA Margin of ~69% as against the only

domestic iron ore player named Sesa Goa (NOW Sesa Sterlite) with margin of 45%. NMDC, also has the

highest PAT Margin of 59% as against the average PAT Margin of 22% of international players. NMDC heads

the competition with highest ROE of 24% as compared to average ROE of 23% of international players and

ROE of 14% of Sesa Goa. Hence, keeping in view the past and future scenario, NMDC is well placed among

both its international and domestic iron ore players.

Valuation

Key Risks

Currently, the stock trades at P/E of 8.58x its TTM EPS of INR15.15 per share. At the CMP of INR130 per

share, the stock trades at P/E of 8.52x its FY14e EPS of 15.3 and P/E of 8.13x its FY15e EPS of 16. On

EV/EBITDA Basis, it trades at 4.35x FY14e EBITDA and 4.06x FY15e EBITDA. We value NMDC at a premium to

its peers on account of its huge reserves, higher margins backed by low cost of production, high iron ore

quality, better visibility in earnings, market leadership in domestic iron ore space and improving cash

balance despite huge capex.

1. Implementation of MMDR Bill in FY15e to double the royalty rates which is expected to impact EBITDA

Margin significantly. 2. Naxalite attack on the slurry pipeline to impact volume growth; Slurry pipeline ‐ the

key lifeline of NMDC transportation to its major customers. 3. Delay in getting forest and environmental

clearances for new mines. 4. Any significant decrease in iron ore prices to hit the realizations. 5. Heavy

rainfall and other natural calamities can hamper the evacuation of iron ore and also cause disruption in

volume dispatches. 6. Government interventions like ban on mining in any particular mine, change in

regulations like hike in freight charges, hike in export duty, etc.

Mcap


NMDC Ltd 8366 2.1 69.0% 64.9% 63.5% 59.3% 56.5% 54.1% 2.0 1.7 1.5 8.1 8.5 8.1 24.4 20.6 19.3 4.5 4.4 4.1

Rio Tinto 69623 49.3 31.2% 37.6% 39.9% 18.3% 17.4% 1.9% 1.9 1.7 1.5 9.8 10.0 8.8 ‐6.1 17.7 19.6 8.6 6.6 5.9

BHP Billiton 61314 29.1 33.4% 45.2% 46.0% 17.9% 20.8% 21.4% 2.2 2.0 1.8 13.1 11.3 10.2 15.9 18.3 18.1 7.4 6.5 6.1

Kumba Iron Ore 15179 47.1 54.4% 57.0% 51.7% 26.8% 28.9% 26.2% 10.2 9.8 10.7 10.2 9.8 10.7 79.3 90.1 69.0 7.7 5.0 5.6

Vale Sa 52832 14.8 37.8% 45.5% 43.1% 24.1% 24.4% 22.9% 6.7 7.1 7.1 1.0 1.0 1.0 6.6 14.6 13.2 7.9 5.2 5.2

Average 39.2% 46.3% 45.2% 21.8% 22.9% 18.1% 5.2 5.2 5.3 8.5 8.0 7.7 23.9 35.2 30.0 7.9 5.8 5.7



Global Peers

PAT Margin P/BVParticulars (in US$ mn)

CMP (in

US$)

EBITDA Margin



SAIL Ltd

BUY Sector – Steel Products

Aggressive volume growth due to new capacity additions to portray surge in revenue post FY14e; amid

falling realizations: SAIL’s volume has been de‐growing at CAGR of ‐1.03% in terms of saleable steel

production (which contributes 90% to the revenue) and at a CAGR of ‐1.3% in terms of crude steel

production. However, the company’s plan of expanding its crude steel capacity from current 13.48MTPA to

21.4MTPA and saleable steel capacity from current 12.4MTPA to 20.2MTPA is likely to boost the volume in a

big way. SAIL is currently implementing Modernization & Expansion Programme (MEP), in which it has spent

INR46,064 crore and expects to spend INR1.5 lakh crore in building capacity to 50 million tonnes (mt) by 2025

for which 50% will be through loans and the rest through internal accruals.

Backward integration of iron ore; to help save margins to some extent: SAIL possessing largest captive iron

ore operations in India, is well placed on raw material front with its total requirement of iron ore being met

from its captive mines, whereas, Tata Steel having just 35% of iron ore linkage from captive mines and JSW

Steel having no linkage at all. For ensuring regular supplies of iron ore to the new facilities, capacities of

existing iron ore mines are being expanded and new iron ore mines are being developed. For improving

coking coal supply, company is also making efforts for development of new coking coal blocks at Tasra and

Sitanala for which statutory approvals have been received. Post expansion the iron ore requirement is

expected to increase from present 22.4MTPA to 39MTPA and coking coal requirement is expected to increase

from present 13.3MTPA to 21MTPA. We believe in future the entire requirement of the increased capacity

shall be met through captive mines for iron ore and import of coking coal to reduce to ~50% and hence

improve margins.

Reduction in capex to improve cash flows and Inventory buildup due to weak demand to ease: SAIL has

planned a capex of INR11500 crore for FY14e and ~INR9000 crore for FY15e. Hence, we expect the capex to

reduce over time as new capacities come into flow, hence, resulting into improved cash flows and increase in

cash balance (as most of expansion is internally funded). Also, the company’s inventory which peaked to a

high level of INR16166 crore due to slowdown in demand, is expected to ease with pickup in demand and

other factors like its diversified products and strong competitive edge.


[email protected]

+033‐30512177

We recommend SAIL a “BUY”. SAIL is one of the leading steel‐making companies in India with an annual

saleable steel production capacity of 12.4mn tonne. We recommend SAIL on back of new capacity addition

leading to enhanced volume, thus, resulting into higher revenue over FY14e, improvement in margin due to

better linkage of coking coal and fully integrated in terms of iron ore and to some extent power also (70%

from captive plants, reduction in capex to improve cash flows, improvement in steel demand easing

inventory pressure and cost optimization initiative to INR5000 crore in next 3 years.

Promoters80.00% FIIs

5.23%




52 Week High 102

52 Week Low 38


Market Data

Scrip ID SAIL Ltd

Scrip Code (NSE) SAIL


Bloomberg Ticker SAIL IN

Reuters Ticker SAIL.BO

Industry Steel Products





Beta Vs Sensex 1.24


Stock Scan

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SAIL Ltd Sensex


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52 Week Low 38


Market Data

Scrip ID SAIL Ltd

Scrip Code (NSE) SAIL


Bloomberg Ticker SAIL IN

Reuters Ticker SAIL.BO

Industry Steel Products





Beta Vs Sensex 1.25


Stock Scan


Net Sales 43707 41263 43258 46662 43961 47339 54390

Growth 9.3% ‐5.6% 4.8% 7.9% ‐5.8% 7.7% 14.9%

EBITDA 9087 10160 7833 6395 4618 5350 6940

EBITDA Margin 20.79% 24.62% 18.11% 13.71% 10.50% 11.30% 12.76%

Adj Net Profit 6245 6851 5014 3594 2170 2428 2679

Adj Net Profit Margin 14.29% 16.60% 11.59% 7.70% 4.94% 5.13% 4.93%

Adj Net Profit Growth ‐17.78% 9.69% ‐26.81% ‐28.33% ‐39.61% 11.89% 10.34%

Adjusted EPS 15.1 16.6 12.1 8.7 5.3 6.1 6.5

Adjusted P/E(x) 6.38 15.18 13.98 10.81 11.88 9.29 8.74

BVPS 68.9 81.7 91.0 97.5 99.3 103.8 108.2

P/BV(x) 1.40 3.08 1.86 0.96 0.63 0.55 0.53

ROE 24.2% 22.03% 14.1% 9.2% 5.4% 6.1% 7.9%

EV/EBITDA(x) 2.70 8.11 7.72 6.15 9.44 7.75 5.98


Financial Performance of SAIL Ltd (All figures in INR Crores except % and per share data)


Peer Comparison

Valuation

At the CMP of INR58, the stock is trading at P/E of 12.26x its TTM EPS of INR4.65 per share and EV/EBITDA

of 8.21x its TTM EBITDA of INR5,020 crore. Hence, the stock looks attractive at its forward EV/EBITDA of

7.75x its FY14e EBITDA of INR5,200 crore and EV/EBITDA of 6.19x its FY15e EBITDA of INR6,814 crore.

Key Risks

1. Increase in coking coal prices as it is the key raw material for the company and constitutes ~35%

of the total expenses and ~60% of the total raw material required annually. Increase in prices is

expected to dent the margins.

2. Rupee depreciation, as it imports around 75% of its raw material coking coal and also increase the

interest burden as ~45% of total debt is forex debt. Volatility in INR/$ can also be a threat as out

of the total debt ~10% of the forex debt is unhedged.

3. Delay in commissioning of projects could drag the capex up and impact the cash flows with

decline in production. Overall this could impact the profitability of the company.

4. Huge Increase in wages could deteriorate the margins as employee costs constitute ~22% of the

total expenses.

2013‐14

Post‐

Expansion 2013‐14

Post‐

Expansion 2013‐14

Post‐

Expansion

Bokaro Steel Plant 4.1 5.8 3.8 4.6 3.3 4.2

Durgapur Steel Plant 2.2 2.5 2 2.2 1.9 2.1

IISCO Steel Plant 0.2 2.9 0.1 2.5 0.2 2.4

Salem Steel Plant 0 0 0.1 0.2 0.3 0.3

Bhilai Steel Plant 5.2 7.5 5 7 4.4 6.6

Rourkela Steel Plant 2.4 4.5 2.2 4.20 2.1 4

VISL 0.1 0.3 0.1 0.20 0.1 0.2

ASP 0 0 0.1 0.5 0.1 0.4

Total 14.2 23.5 13.4 21.4 12.4 20.2

Hot Metal (MTPA) Crude Steel (MTPA) Saleable Steel (MTPA)Plant

Mcap

(INR in Cr) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

SAIL Ltd 23544 57 10.5% 11.3% 12.8% 4.9% 5.1% 4.9% 0.6 0.5 0.5 10.9 9.3 8.7 5.4 5.8 6.3 6.8 7.8 6.0

Tata Steel Ltd 29331 302 9.2% 10.4% 11.5% 0.2% 1.9% 4.3% 0.9 0.8 0.8 88.3 11.2 8.4 ‐18.4 7.6 9.2 7.1 5.9 5.4

JSW Steel Ltd 17335 777 17.1% 16.8% 17.2% 2.5% 3.8% 4.3% 1.0 0.9 0.9 18.6 11.3 9.2 5.6 8.3 9.8 5.4 5.9 5.4

JSPL Ltd 23557 252 31.3% 31.4% 31.8% 14.9% 14.0% 13.1% 1.1 1.0 0.9 8.1 7.7 6.7 14.8 13.1 14.2 9.4 7.2 5.8

Bhushan Steel Ltd 10534 480 32.2% 30.0% 29.5% 8.8% 8.3% 8.5% 1.1 1.0 0.9 11.6 9.0 6.9 10.8 11.9 13.1 11.5 9.4 7.9

Average 22.5% 22.1% 22.5% 6.6% 7.0% 7.5% 1.0 0.9 0.9 31.7 9.8 7.8 3.19 10.25 11.57 8.4 7.1 6.1


Domestic Peers

PAT Margin P/BVParticulars (in INR Cr)

CMP (in

INR)

EBITDA Margin



Tata Steel Ltd

BUY Sector – Steel & Steel products

Greenfield coupled with brown‐field expansions to boost volume growth in Indian Operations:

Tata Steel India is set to deliver strong volume growth over FY14‐17e on full ramp‐up of 2.9MTPA

brown‐field plant at Jamshedpur. Tata Steel commissioned its 2.9MTPA Jamshedpur brown field

expansion project in FY13 and it is expected that full benefit will come in FY15. The company is

likely to consider another 3MTPA expansion at Orissa after commissioning of this facility. Further,

some of the project facilities are being constructed keeping in mind the eventual expansion to

6mtpa. The capex for the next 3mtpa phase of this project would only be 50‐60% of the first

3mtpa phase. Accordingly, the highly profitable Indian operations would drive strong volume

growth for several years.

Turnaround in Europe Operations to be the key trigger: With the recent encouraging signs of

improving economic conditions in Europe, the UK in particular, the management expects the

demand in Europe (where it derives 2/3rd of its 27MT of annual capacity) to recover by the end of

FY14e. Also, the company’s restructuring initiatives like launching new products to boost value

addition and improve product mix, write down of $1.6 bn due to weak demand, cost‐cutting

measures, reducing headcount, shutdown of high cost facilities, selling of non‐core assets and

disinvestment of non‐profitable subsidiaries have already started showing positive results for last

couple of quarters. We believe the company is poised to capitalize the improvement in Europe if it

translates more strongly into increased demand from steel‐intensive sectors. Following the above

measures with the support of recovering demand, we believe the European operation to post

better results in future.

Management’s view of timely capex completion and de‐leveraging the balance‐sheet a positive

move: With the timely capex completion and company’s strategy to de‐leverage the balance sheet

by going for refinancing of debt (which is expected to go record high in FY14e due to the on‐going

investment in Odisa phase‐I expansion) and selling non‐core assets is a positive move.


[email protected]

+033‐30512176

We recommend a “BUY” on Tata Steel Ltd. The company is the world’s sixth‐largest steel company

with an existing annual crude steel production capacity of ~30MTPA. Post the Corus acquisition; it

has diversified business spread across Europe, South East Asia and pacific‐rim countries. Hence,

with Greenfield and brown‐field expansion to boost volume in Indian operations, turnaround in

Europe operations, timely completion of capex and moves to de‐leverage the balance sheet bodes

well for the fortune of the company on a longer period of time.

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Tata Steel Ltd Sensex

Promoters 31.35%

FIIs13.08%



Others 2.66%


52 Week High 448

52 Week Low 195


Market Data

Scrip ID Tata Steel Ltd

Scrip Code (NSE) TATASTEEL


Bloomberg Ticker TATA IN

Reuters Ticker TISC.BO

Industry Steel/Sponge Iron/Pig Iron





Beta Vs Sensex 1.26


Stock Scan


Net Sales 147329 102393 118753 132900 133417 141524 153200

Growth 12.0% ‐30.5% 16.0% 11.9% 0.4% 6.1% 8.3%

EBITDA 18113 7999 16747 12366 12321 14779 17564

EBITDA Margin 12.29% 7.81% 14.10% 9.31% 9.23% 10.44% 11.46%

Net Profit 4951 ‐2009 8983 5390 ‐7058 2640 3470

Adj Net Profit 856 ‐3693 12028 8752 332 2653 6517

Adj Net Profit Margin 0.58% ‐3.61% 10.13% 6.59% 0.25% 1.87% 4.25%

Adj Net Profit Growth ‐95.42% ‐531.23% ‐425.69% ‐27.24% ‐96.20% 698.47% 145.65%

Adjusted EPS 66.3 ‐23.2 93.7 55.5 3.4 27.0 35.9

Adjusted P/E(x) 3.11 ‐27.29 6.62 8.48 91.32 11.19 8.41

BVPS 303.3 257.3 369.2 428.5 351.9 366.1 396.3

P/BV(x) 0.68 2.46 1.68 1.10 0.89 0.82 0.76

ROE 19.1% ‐9.44% 30.4% 12.9% ‐19.6% 7.6% 9.2%

EV/EBITDA(x) 3.99 10.68 6.27 6.78 6.76 5.92 5.36

Financial Performance of Tata Steel Ltd (All figures in INR Crores except % and per share data)



Tata Steel Odisha unit's phase‐I to start operations in Q4FY14e The work on the first phase of Tata Steel's Kalinganagar project in Odisha, entailing an

investment of the INR25,164 crore, is in full swing and operations are likely to commence in the

last quarter of 2014. We believe that timely commission of the unit would improve volume

growth from Q4FY14e onwards. Tata steel has a major capex programme in Odisha to set up a

6MT steel plant, which has been planned in a phased manner. It is divided into two units of 3MT

each and will produce flat steel products for the automobile industry.

Peer Comparison

Valuation

At the CMP of INR302 per share, the stock is trading at EV/EBITDA of 5.74x its TTM EBITDA of INR12,980

crore. Hence, the stock looks attractive at its forward EV/EBITDA of 7.75x its FY14e EBITDA of INR14,779

crore and EV/EBITDA of 5.98x its FY15e EBITDA of INR17,564 crore.

Key Risks

1. A slower than expected recovery in European economy is expected to hamper the

European business.

2. Delay in expansion to dent the cash flows and increase the already inflated debt.

3. Rupee depreciation to increase interest burden as the company has 70‐75% of forex

debt, out of which major portion is unhedged.

4. Increase in iron ore and coking coal prices could dent margins on consolidated basis as

Tata Steel has only 35% linkage to iron ore from captive sources and 15% linkage to

coking coal from captive sources.

Mcap

(INR in Cr) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Tata Steel Ltd 29331 302 9.2% 10.4% 11.5% 0.2% 1.9% 4.3% 0.9 0.8 0.8 88.3 11.2 8.4 ‐18.38 7.62 9.19 7.14 5.93 5.36

SAIL Ltd 23544 57 10.5% 11.3% 12.8% 4.9% 5.1% 4.9% 0.6 0.5 0.5 10.9 9.3 8.7 5.37 5.77 6.30 6.76 7.75 5.98

JSW Steel Ltd 17335 777 17.1% 16.8% 17.2% 2.5% 3.8% 4.3% 1.0 0.9 0.9 18.6 11.3 9.2 5.57 8.34 9.83 5.43 5.91 5.35

JSPL Ltd 23557 252 31.3% 31.4% 31.8% 14.9% 14.0% 13.1% 1.1 1.0 0.9 8.1 7.7 6.7 14.79 13.13 14.19 9.39 7.23 5.77

Bhushan Steel Ltd 10534 480 32.2% 30.0% 29.5% 8.8% 8.3% 8.5% 1.1 1.0 0.9 11.6 9.0 6.9 10.79 11.90 13.09 11.53 9.42 7.86

Average 22.8% 22.4% 22.8% 7.8% 7.8% 7.7% 1.0 0.9 0.8 12.3 9.3 7.9 9.13 9.78 10.85 8.3 7.6 6.2

Domestic Peers

Particulars (in INR Cr)CMP (in

INR)

EBITDA Margin PAT Margin P/BV P/E ROE (%) EV/EBITDA


Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]

Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]

Fundamental Research

Name Sectors Designation Email ID

Nitin Prakash Daga IT, Telecom & Entertainment VP‐Research [email protected]

Naveen Vyas FMCG, Midcaps, Mkt VP‐Research [email protected]

Sutapa Roy Economy Research Analyst s‐[email protected]

Sanjeev Jain BFSI Research Analyst [email protected]

Neha Majithia Metal, Mineral & Mining Research Analyst [email protected]

Soumyadip Raha Oil & Gas Executive Research [email protected]

Saroj Singh Auto, cement Executive Research [email protected]

Kapil Bhati Fert, Chem & Agri Executive Research [email protected]

Technical & Derivative Research

Vinit Pagaria Derivatives & Technical Senior VP [email protected]

Ranajit Saha Technical Research Sr. Manager [email protected]

Institutional Desk

Puja Shah Institutional Desk Dealer [email protected]

Abhishek Sharma Institutional Desk Dealer [email protected]

PMS Division

Siddharth Sedani PMS Research VP [email protected]

Ketan Mehta PMS Sales AVP [email protected]

Research‐Support

Subhabrata Boral Research Support Asst. Manager Technology [email protected]

Recommendation

Strong Buy >20%

Buy between 10% and 20%

Hold between 0% and 10%

Underperform between 0% and ‐10%

Sell < ‐10%

Expected absolute returns (%) over 12 months

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MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Neither the Firm, nor its directors, employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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