Metal Stocks - Best buys !!

The metals sector has been facing a tough time, partly due to the correction in global commodities prices and also because of certain domestic developments like the ongoing CBI probe into the mining industry in Karnataka.

Many frontline metal stocks like JSW Steel, Tata Steel, Sesa Goa, Hindalco and Sterlite, to name just a few, have seen a severe contraction in prices. What has further compounded the problem is the ongoing crisis in the Euro Zone and the fear that China's metal demand may slow.

It is tough to say which metals segment — copper, steel or aluminium — would take a greater hit than the others or whether the producers catering to domestic demand would be spared from demand recession compared to companies like Tata Steel which has a significant presence in European markets.

But for long term investors, it would be tempting to know whether the current meltdown in metal stocks make them hot investments, even in the likelihood of further price correction in these shares. All the five metal stocks mentioned earlier have suffered serious erosion in value and three of them have seen their Price to Earnings (PE) ratio come down to single digits.

The extent of carnage the sector has suffered could be judged by taking a look at today's NSE closing prices compared to their year's high (given in brackets):

Sesa Goa - Rs 204.25 (Rs 383.65); Jindal Steel and Power – Rs 480 ( Rs 755.50); Tata Steel - Rs 420.70 ( Rs 737); Hindalco - Rs 126.10 (Rs 252.85) and Sterlite - Rs 113.35 (Rs 195.95).

But what is intriguing is that while the stocks of metal companies has seen a correction, it is not as if all metal prices have corrected. For instance, the steel prices have not gone down so much compared to the share price of steel stocks. Given the problem in mining in India, it is possible that domestic steel prices may remain firm, benefiting steel producers.

In an interview to Business Line, Mr Bhavesh Chauhan (Senior Research Analyst  — Metals & Mining), Angel Broking, Mumbai, shares his views on the metal sector's performance and what it holds for them in future. Excerpts:           

Metal stocks have taken a hammering. Do you consider them worthy of investment at current prices or is some more pain due?

The last 6-8 months have been bad for metal companies due to escalating debt crisis in Europe and stocks have been battered. As long as the situation in Europe remains grim, metal demand would remain weak and sentiment will keep metal prices lower. Monetary tightening in China has also played its part, although there hasn't been any huge decline in China's appetite for resources so far.

Different metal stocks (Sterlite (copper), Hindalco (aluminium), JSW Steel, Tata Steel and Sesa Goa) have suffered. Do you see any particular company recovering in the short term? Are all metal stocks in the same league?

Metal being a global commodity, all the stocks would be in the same league, although broadly we classify the companies as ferrous and non-ferrous and then we could have the classification in terms of steel makers and miners as well. Again, recovery of any stock would depend on how Europe shapes out. Also, there are concerns on US going into double dip too. So that factor has to be seen closely.

The reasons for the downslide in shares — controversy in the Karnataka mining sector and slowdown in Europe — are different. Do you think it would take some time for these negative factors to disappear?

 For Karnataka mining, it is more of a regional thing and it affects companies operating in Karnataka. I believe the Karnataka issue could be sorted out in 6-9 months. European slowdown is a big concern actually and how long it will take for these factors to disappear is a challenging question.

The economic slowdown has led to demand contraction resulting in fall in metal prices. But any economic recovery would see demand for metals picking up. So, do you feel the fall in prices is temporary or will it continue for a while?

Any recovery in Europe should see base metal prices recovering, although the way the scenario is today, it is difficult to give a time frame. At least in the near-term I do not expect any recovery in base metal prices.

Which are the sectors that would benefit due to metal prices falling — autos, housing, electrical goods, capital goods. Do they have any upside potential because of this?

Companies in capital goods and infrastructure will benefit if prices fall. However, steel prices have not fallen so far. Steel is the commodity which is used mainly as a raw material in machinery and construction. We do not expect any significant fall in steel prices anyway as prices of raw material remain high and are expected to remain firm due to supply concerns.

Though metal prices have fallen, the woes in Europe and US may not lead to pick-up in demand for products. How will Indian companies benefit?

Base metal prices have fallen. So, a little benefit will flow to some companies. However, steel remains the most widely used commodity.

How will the rise in dollar value and fall in rupee value affect the Indian metal cos? Hasn't the fall in rupee value neutralised any benefit of fall in commodity prices?

With the rupee depreciating, it helps companies selling metals as imports become expensive and hence domestic producers can raise prices. As far as importers of commodities are concerned, so far the falling rupee has offset falling commodity prices as you rightly say.

Have the frontline metal stocks become investment worthy after price correction? What are your picks and why?

We do feel that front-line metal stocks are now worth investing as we believe markets are discounting on the near term global macro issues (primarily Euro zone crisis). The current price levels do not discount the expansion plans by companies over the next 2-3 years. We like companies with captive resources and big expansion plans. With captive resources, these companies would generate higher return on capital employed at even current metal prices. Though we like Hindustan Zinc, SAIL, Sterlite amongst others, Tata Steel and Hindalco are our top picks –Tata Steel with a target price Rs 614 and Hindalco with a target price of Rs 196.

We like Tata Steel for its buoyant business outlook, driven by higher sales volume on completion of its 2.9 mt brown field expansion in Jamshedpur. The company's raw material projects are expected to be commissioned by 4Q FY2012 with lower off take initially; the full benefit is expected to accrue in FY2013E. Additionally, restructuring initiatives at Tata Steel Europe are likely to benefit the company going forward. We believe Hindalco is well placed to benefit from its aluminium expansion plans (capacity increasing by nearly two-three folds in the next two-four years). Most of its new capacities will be backed by captive mines leading to robust margins. Further, we expect steady EBITDA of $1 billion annually from Novelis.   

Steel prices have not fallen much but steel stocks have suffered. Because of the mining issue, steel prices may remain firm. Does that make steel stocks attractive for investment?

Steel prices have not fallen because prices of iron ore and coking coal across the globe are still firm. The mining problem is only India-specific and does not have any impact on the steel prices, which are globally determined. We believe steel stocks are attractive given that their margins have shrunk drastically over the last 9 months or so. We like steel stocks as coking coal prices are expected to fall, interest rates in India should fall sooner than later, capex cycle should pick up in the next six months. The stock prices have discounted all the negatives, leaving some of the stocks highly undervalued. 

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Tata Steel Buy on dips !

Tata Steel

After turning around on a quarterly basis in 2009-10 itself, Tata Steel turned around on an annual basis in 2010-11 and reported a consolidated net profit of Rs 8,983 crore for the year compared to a net loss of Rs 2,009 crore in the previous year.

The performance of its European operations continues to improve. For example, European operations witnessed strong volumes of 4.13 mt in the fourth quarter of 2010-11 compared to 3.47 mt in the previous quarter. This is partially on account of the company's efforts towards de-stocking. Analysts believe that these volumes should decline sequentially in the first quarter of 2011-12.

Tata Steel has also sold its entire stake in Riversdale Mining for a consideration of $1.11 billion. This value unlocking at a gain of around 100% (considering that its total investment was only of $573 million) will help it to manage the finances better.

However, the European debt crisis poses a problem. Since it has a significant exposure in

Europe, any blow out (Greece defaulting on its sovereign debt and contagion across Euro zone area) there can affect the company, both fundamentally as well as on the sentiment front. So investors are advised to buy slowly into this counter.

Our Recommendation :

Buy Tata Steel around 525 levels and hold for 1 year for a target price of 750

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Tata Steel FPO

Adarsh Gopalakrishnan

BL Research Bureau

Tata Steel's public offer, which is in the Rs 594-610 price band, is an attractive one, considering that investors need pay only Rs 7.3-7.5 (price-earnings multiple) for a rupee of earnings on shares subscribed to by them.

The valuation is also cheaper than domestic or comparable international steel companies.

The value of Tata Steel as an enterprise, on a per tonne basis, is lower than what it would cost to replace its assets at current prices and also lower than its peers'.

The expansion in India will increase the proportion of domestic output for Tata Steel relative to that overseas — an advantage since the former is far more profitable. The Jamshedpur plant will account for 35 per cent of the consolidated capacity on adding 2.9 million tonnes of brownfield capacity by the end of next year.

The second factor working in its favour is the prospect of European operations stabilising with the loss-making Teeside facility shed and an ambitious raw-material integration programme under way. Both should result in significantly improved profitability on a consolidated basis. This offer targets proceeds of between Rs 3,390 crore and Rs 3,480 crore for the ongoing brownfield expansion plans in Jamshedpur and part of it will be used to repay non-convertible debt falling due in May.

DOMESTIC ARM

Indian steel consumption grew by 7.4 per cent for the 11 months ended November 2010, fuelled by healthy demand from the automobile and construction segments. Steel consumption tracks that of GDP growth and the latter is expected to grow at 8-10 per cent over the next five years.

The company's domestic operations have made Rs 30-40 of cash on every Rs 100 of sales before providing for depreciation, interest and taxes over the last three years.

Tata Steel's Indian operations saw sales for the first half of the current fiscal growing at 21 per cent to Rs 13,509 crore while net profits expanded by 115 per cent to Rs 3,644 crore. The strong performance was due to the previous fiscal's low base and higher realisations which the company capitalised on. Being a largely integrated player with large captive mining operations and reliant only to the extent of 50 per cent for coking coal, the company pockets proceeds from price hikes which less integrated players pass on to miners.

EUROPEAN OPERATIONS

In contrast, Tata Steel's consolidated numbers for the first half of the year grew by 13.7 per cent to over Rs 55,000 crore while profits bounced back into the black to over Rs 3,800 crore. However, the bounce-back in steel consumption was fuelled by stimulus measures for automobile sales, among other segments. The first eleven months of 2010 saw European steel production rise by 26 per cent on alow base provided by 2009 which saw 30 per cent decline in steel production.

With the effects of stimulus wearing off, the recovery is expected to be of the slow and grinding variety and in pockets such as the UK would be further exacerbated by severe austerity measures undertaken by the British government. The recovery has also faced several road-blocks in the form of sovereign debt crises in several constituents. Limited utilisation of European steel production capacity, which remains at 70-80 per cent, has kept realisations on a tight leash in Europe.

Tata Steel Europe (erstwhile Corus) has responded by shedding or idling assets such as the Teeside Casting Plant (whose output found few takers) and optimising capacity at its other production facilities. Tata Steel Europe's operational measures have included tying up raw material sources of iron ore and coal in Canada and Mozambique, among other places. The company is hoping to improve margins at its European operations by reducing the extent of reliance on external raw material sources.

THE BIG PICTURE

The company plans to counter a stagnant or slow-growth European market by aggressively adding capacity at the relatively faster growing and more profitable operations domestically. The fully integrated domestic capacity of 10 million tonnes would account for a third of the consolidated output and boost EBIDTA margins. In the longer run, the company plans to add, in two phases, 6 mtpa of steel capacity in Orissa by 2013-14. This, along with a relatively well-integrated European capacity, will result in a more balanced and profitable Tata Steel.

CHALLENGES

The company's current net debt equity levels stand at 1.76 which should move to 1.46 on the post-issue capital. The company currently holds Rs 55,000 crore of consolidated debt, and the issue should serve to deleverage the balance sheet to a limited extent. However, greenfield expansion plans will require borrowing, which could peg up this level again.

The consolidated operations are largely dependent on external sources for raw materials. External shocks such as the floods in Queensland, Australia, could have an impact on the European operations. Over the last few months, steel makers have also been under pressure due to slipping demand and rising raw material costs which steel producers have been unable to completely pass through. Steel producers globally recently undertook a series of price hikes, but the fragile European setting and inflation-prone Asian economies have been sensitive to price hikes in steel, putting pressure on the margins of steel producers.

Source : Businessline

Our Recommendation :

Long term investors should buy in the secondary market where they can get below the issue price post listing. Since there will be more floating stock in the short term 6-9 months the stock is likely to under perform. Stay away re-enter around 550 levels

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BSE Metal Index Review Q2 Analysis

Adarsh Gopalakrishnan

Indian steel producers such as SAIL, JSW and Tata Steel have posted spectacular returns of 231, 685 and 315 per cent from the lows of early 2009. On an enterprise value-per-tonne basis, they currently trade at a premium of 45-100 per cent to most global peers such as Arcelor Mittal. This reflects the strong prospects and higher profitability of the domestic steel sector, despite uncertainties faced on the competition and policy fronts.

Anticipating the growing demand for steel, leading producers have embarked on expansion projects that are expected to double the domestic steel production over the next five years. SAIL, Tata Steel, JSW, JSP and NMDC are betting on giant leaps in infrastructure spending and steel consumption in the form of housing, automobiles and consumer durables.

The possible rationale for this huge capacity jump are GDP growth projections of 9-10 per cent, thanks to doubling automobile sales, massive power capacity additions, upcoming real-estate projects, and so on. However the big question is: Can the companies put through these ambitious expansion plans while maintaining their much envied levels of integration and the resultant profitability?

Indian steel companies managed to hold on to profitability in the crisis of 2008, despite rising iron ore, coal and raw material prices, owing to their low operational cost and unique raw material set-up. These companies are now scaling up capacity to join global ranks. However the challenge for players such as SAIL and Tata Steel is not just to move up the value chain and scale, but to maintain their current levels of profitability while they are at it.

HOW to STAY RUNNING

India's top three steel producers — SAIL, JSW and Tata Steel — recorded operating margins of 20-45 per cent over the last three years compared to Korean producer Posco ( the most efficient producer globally) with margins of 10-20 per cent.

The higher margins are a result of Tata Steel, SAIL and Jindal Steel and Power holding mining licences for their entire iron ore and part of their coal requirement since the early days of their operations.

The fixed costs of mining are estimated to be Rs 700-2,500 per tonne, compared with the current global market prices of Rs 6,750/tonne of high-grade iron ore and Rs 9,000/tonne of coking coal. This has been an advantage over the last 4-5 years, as it has almost always been cheaper to incur the fixed costs of mining inputs rather than having to purchase them from international markets.

International prices of iron ore and coking coal have gone up six-fold and four-fold respectively over the decade, with increased consolidation among miners and the increasingly import-reliant Chinese steel sector. Large iron-ore reserves, coupled with low operating costs, integrated power generation capability and a tightly-supplied domestic market enabled Indian steel producers to enjoy a premium among global metal stocks.

The superior margins and growing domestic market have also been a major draw for such global players as Arcelor Mittal, Posco and some Japanese players. This has heated up the competition for both iron ore mines and the land around those mines.

HEADED FOR OVER-CAPACITY?

Sustained weakness in the developed markets is forcing several international steel majors to look towards India for expansion. India's low per capita consumption of steel, at 43 kg, makes several observers sit up at the growth possibilities. The last year has been dynamic in terms of intent expressed by some international players.

Arcelor Mittal plans to set-up multiple 3 mtpa plants across India. Japanese players, such Nippon Steel, Sumitomo and Kobe, have announced tie-ups with Tata Steel, JSW, Bhushan Steel and NMDC, respectively, for specialised steel plants and technology transfer. Posco, whose own greenfield plant faces hurdles, is expected to announce a tie-up with SAIL. These foreign moves are in addition to the massive greenfield and brownfield moves by Tata Steel, JSW, SAIL and JSP, which are expected to take their cumulative capacity from the current 31 million tpa to 51 million tpa over the next two years.

Major additions by Tata Steel and JSW are focussing on the flat product segment, with their crude steel capacity additions accompanied by hot and cold mill additions. Players such as Bhushan Steel, that are steel processors, are looking to vertically integrate by moving into steel billet and slab production. SAIL is taking the middle path by trying to boost margins by moving out of the semis category and expanding the value-added and flat product segments.

With this, the total Indian capacity is expected to hit 110-120 million tpa of capacity from the current 66 mtpa over the next five years. The steel industry's move is best summed up using a poker term — it's an ‘all in' bet. For this bet to pay off, the steel sector needs to bet that steel consumption will grow at a CAGR of 14-15 per cent over the next five years. This is almost double the current rate.

It would not only require explosive and sustained performance from cyclical sectors such as the automobile and consumer durables industry and the bubble-prone real estate space but the government would also have to ramp up its direct spending and support for infrastructure.

A liberal compounded growth rate of just under 11 per cent per annum indicates that domestic steel consumption in 2014 will reach 100 million tonnes, resulting in an overhang of 10-20 million tonnes. Imports remain a source of supply too, with exports being outpaced over the last four years. Global competition in the export space comes from countries such as China, Russia, Kazakhstan and Japan. Despite talk of ‘consolidation' in the near term, reports indicate that regional Chinese steel players continue to replace small mills with larger more efficient capacity. Similar additions are underway in Russia, where companies pursue a strong export-led expansion under operating conditions that are rather similar to India in terms of raw material integration. Japan is another steel-surplus economy.

Growing Indian steel exports are a certain possibility, considering our low-cost production know-how but it is likely to remain a challenging and capacity-heavy battleground.

The key counter to capacity additions powering ahead, are delays in the implementation of several greenfield plants which account for at least 30-35 million tonnes of capacity. First is the slowdown in the steel realisations, leading to nervous steel producers deferring investment plans. Reports point to the strong possibility that steel prices are likely to remain under pressure over the near term as the industry adapts to a ‘new normal' of lower consumption in mature markets and China tightens its domestic industry to achieve economies of scale and meet power conservation targets.

Closer home, the new Mining Bill is reported to contain a clause which entails a 20 per cent payment to the local population for the consumption of local raw materials. This move will impact domestic integrated producers and narrow their margin advantage. The last, and possibly the biggest, hurdle is the one of securing mines and land for setting up steel plants, for which clearances appear challenging in light the Environment Ministry's recent firmness in dealing with such issues.

Perceived domestic risks of non-conducive mining and environment policies and archaic land acquisition laws may inadvertently turn out to be the prudent bartender refusing to serve steel producers on a capacity addition binge. However, the latter's actions indicate a certain air of inevitability and expectation that government spending and policy will come good for the capacity they are adding over the next decade.

Position in the cycle

Firm steel prices will ultimately decide whether domestic players expand or hold back. The start of 2010 saw domestic steel players effect regular hikes in response to buoyant demand and rising input costs.

After bumps in the form of the crises in Dubai and Greece and a cooling China, prices have recovered from the July-lows. This was due to surging German exports, Chinese restocking and raw material price hikes. The second quarter of the current fiscal saw both domestic flat and long steel prices rule 8-10 per cent higher, at Rs 35,000 and Rs 28,000 per tonne respectively, than during the same quarter in the previous fiscal. The ‘new normal' in steel could see the shuttering of several less efficient plants in the developed markets as an adjustment to depressed sales as a result lower levels of consumption.

Though steel has historically witnessed a 3-4 year cycle of improving realisations the cycle may turn more volatile with the advent of quarterly price contracts for inputs, the unpredictable influence of the Chinese steel industry and growth uncertainties in developed markets. Prices are likely to moderate and may move south over the next six months.

The fittest ones

In the listed primary steel producer space, SAIL seems the most attractively placed, thanks to high cash, low debt and significant levels of integration and land available for expansion.

All this has led Posco and Arcelor Mittal to try and woo SAIL into JVs for steel production.

Also on the cards is SAIL's foray into specialised steel production with BHEL.

Not far behind are operationally-tight JSW, whose expensive American buy of Jindal SAW's slab and pipe facility operates at low utilisation levels, in addition to costing the company valuable debt that could have come in handy for its domestic foray. Despite early signs of stabilising European operations, Tata Steel must be kicking itself for buying Corus at the peak.

But the company runs a tight ship, coupling operational excellence with mine integration and producing industry-topping margins which, if replicated at the Orissa plant, could result in a more balanced Tata Steel.

The secondary segment features some promising, albeit stiffly- priced, candidates whose operational track record and margins stand to gain with scale and new forays.

Some of these are: Bhushan Steel, which produces cold rolled steel for automobiles and consumer durables.

A foray into steel-making, acquisition of an Australian coking coal miner and tie-up with Sumitomo leave this fully priced company well-spaced to grow margins and volumes.

Usha Martin, which produces steel wires and rods for the infrastructure space also boasts of enviable margins and returns, with scope for better capacity utilisation boosting earnings.

In the steel and power combo space are Jindal Steel and Power and Monnet Ispat, which have ambitious plans to expand in both segments and boast of industry-topping margins in the sponge iron space, that offers good insulation against raw material volatility.

Both the companies are ideal candidates to accumulate on dips.

Source BL

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Steel Sector - Q1 will be tardy

Commodity pack as a whole has seen tremendous volatility in past few months, and steel stands no exception. European economic crisis, Euro-Dollar fluctuations, huge inventory pile ups in the domestic arena have all added to the misery. Looking at this, the Indian steel manufacturers and around the world resorted to price cuts in June 2010. Prices dropped 5% m-o-m to Rs 32,700/tonne during second week of June.

On the other hand, raw material prices have been adding to the woes of steel manufacturers. Where coking coal saw average spot prices at $220/tonne in Q1FY11, the contract prices at $200/tonne during the first quarter were already 55 percent higher as compared to $129 per tonne in the previous corresponding period. These are likely to see further upside during the second quarter. In the beginning of the first quarter of the current financial year, analysts expected $60-70/mt rise in prices of steel given the rise in coking coal prices. However, the glut due to inventory pile up forced steel manufacturers to opt for price cuts.

Iron ore also stood no exception. The contract prices at $110-120/tonne during first quarter of the current fiscal had seen rise of 80 percent as compared to $61/tonne during FY10. Australian iron ore miners such as BHP Billiton and Rio Tinto have already indicated that contract prices may rise from around $120 a tonne in the April - June 2010 quarter to around $158 a metric ton in Q2FY11.

Despite a steep rise in raw material prices, spot prices for steel at $685/tonne on 30 June, 2010 have been marginally 3 percent higher than $665 on 31 March, 2010; although these were 41.8% higher y-o-y thanks to rock bottom prices of steel a year ago.

For the near-term there are little hopes for early recovery in prices with robust production in China and subdued demand in Europe squeezing the margins for steel manufacturers. This will be reflected in the first quarter results for Indian manufacturers, feel analysts.

SAIL will be hit the hardest on the revenues as well as margins front. With around 1.35 million tonnes (MT) sales volumes in April-May 2010, selling 2.7 MT in Q1FY11 looks difficult. Analysts at Motilal oswal have cut volume estimates to around 2.4 MT for the April-June 2010 quarter, with realizations at Rs 3610 per tonne, down one percent y-o-y. While coke prices were higher, the iron ore supplier - NMDC – has increased contract prices of iron-ore to Rs 270 per tonne during the recently concluded quarter (6-15% higher on various grades).The net sales are pegged at Rs 8664.2 crore, down 5.3% with EBIDTA margins losing 401 bps. Hence, PAT is expected to clock in at Rs 944.4 crore, 29.4% lower than a year ago.

JSW Steel, on the other hand, is expected to be best performer in the first quarter among the lot. Sales volumes are pegged at 1.45 MT up 9.8% y-o-y. Realizations are likely to be at Rs 3510.8 per tonne due to good sales volumes in April-May 2010 before June price cuts. Net sales at Rs 5077.6 crore will thus grow 29.6 % y-o-y with operating margins improving 304 bps to 22.5 and adjusted PAT at Rs 480.6 crore, growing robust 396% on a y-o-y basis, analysts say.

Tata Steels’ sales at 9,12,000 tonnes in Apr-May 2010 were flat, and after price cuts in June, analysts expect the company to report sales volumes at 1.42 MT. With net sales pegged at Rs 5985.3 crore in Q1FY11, realizations are expected to improve by 6.9 percent to Rs 3925.3/tonne. Tata Steel had old inventories and contracts, and hence, iron ore and coal price increases will not affect first quarter's results. However, in the second quarter it should feel the heat in line with other manufacturers. EBIDTA margins in first quarter are likely to gain 610 bps. Their European subsidiary, Corus, is seeing an improvement in realizations, which are pegged at $ 160/ tone and will add to EBIDTA growth sequentially. The consolidated sales for Tata steel are estimated as Rs 29,089.1 crore, growing 24.8 percent y-o-y. Profits are estimated at Rs 2952.9 crore, as against last years’ losses.

The road ahead for the steel manufacturers seems bumpy, with realizations and margins feeling heat of price cuts in June and raw material costs rising further. The uptick in raw material prices will at some point force steel players to go for price hikes, and analysts expect that raw material prices will start adjusting too. The recovery will come in second half of financial year. Till then, the outlook for this sector remains bleak.

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Steel Industry - Buy Tata Steel & Jindal Steel Power

With input prices on the rise, non-integrated steel producers may find it difficult to sustain margins if steel prices do not rise in proportion

To produce a tonne of steel it requires about 1.6 tonne of iron ore and about 0.7 tonne of coking coal. And, these raw materials put together account for almost 70-75 per cent of the total cost to produce a tonne of steel. This is also precisely a reason that whenever there is an increase in the raw material cost, steel companies have little option but to increase steel prices so that they can make reasonable profits. In the current scenario, when steel prices are trading at relatively lower levels and there is less appetite for any price rise among the customers, Indian non-integrated steel companies might see an impact on their profitability given the recent increase in raw material prices.

Input prices on the rise…
In January 2010, NMDC had raised its domestic iron ore prices by about 15 per cent. Very recently, NMDC intimated to the industry that it has further increased iron ore prices by about 30-50 per cent on a provisional basis effective April 1. NMDC’s iron ore fines that recently sold at about $43 per tonne in the domestic market are now expected to cost over $70 per tonne. While NMDC’s provides iron ore at lower prices to domestic companies (as compared to its prices for global customers), prices are revised according to the trend in international prices. The rationale behind this seems to be the higher international iron ore prices. The Australian long-term contract prices are now being negotiated at about $110-120 per tonne, which is almost a 100 per cent jump from $60 per tonne a few months back. The Chinese spot iron ore prices have also moved up from $90 per tonne in October 2009 to currently about $152 per tonne.

The situation is equally grim in the case of coking coal prices, which have seen a steady rise for last six months. Coking coal benchmark price for the quarter April 2010 to June 2010 has been set at $200, which is significantly higher compared to last year’s benchmark price of $128 per tonne. Analysts believe that the coking coal prices could further rise and cross the $200 a tonne in 2010-11.

…and its impact
The rise in coal and iron ore prices would mean that the cost of production for the every tonne of steel will go up by almost $120-130 or by Rs 5,400-5,800 per tonne. No wonder that domestic flat steel prices have been moving up; they are up by 18 per cent in last three months and currently hover around Rs 37,810 per tonne.

More importantly, analysts believe as the raw material prices have increased and are expected to increase further, the recent increase in steel prices still does not offset the impact of higher input costs. For instance, Indian steel producers have increased steel prices by Rs 2,500-3,000 per tonne whereas the cost escalation has been in the range of Rs 5,400-5,800 per tonne. This is also a reason that analysts believe that the companies might further increase prices, in a manner that steel demand is not disturbed.

Demand-supply situation
Given the current market scenario, companies have so far been able to pass on a part of the input cost increases to the consumers on the back of the reviving global economic growth. According to the data provided by the World Steel Organisation, India’s steel production was up by 20 per cent in February 2009 followed by 25 per cent growth recorded by China. Even the world steel production was up by 27 per cent in February as a result of recovery in the steel demand.

The demand for steel is expected to continue to be good considering the industrial revival and higher spending on the infrastructure and construction activity in the country.

This in turn should give steel producers some pricing power.

Outlook
Steel producing companies that do not have captive sources of raw material supply can now feel some relief given that higher steel prices will allow them to pass on the increase in raw material prices. However, the major benefit of this will accrue to companies which are fully integrated.

For instance, SAIL has the advantage of 100 per cent captive iron ore, while it procures 30 per cent of its coal requirements from the domestic market and 70 per cent from imports. On the other hand, JSW Steel depends on imported coal for its entire requirement and only 20 per cent of iron ore is from captive sources. This is also a reason that SAIL and JSW Steel earned EBIDTA per tonne of about Rs 8,000-9,000 per tonne as compared to over Rs 13,700 per tonne earned by the Tata Steel, which is a fully integrated player (excluding its global operations).

In the present scenario, analysts thus are expecting companies like Tata Steel and Jindal Steel & Power to be in better position given their access to captive raw material supplies. Any further increase in the steel prices (as expected by analysts) will mean higher gains for these integrated players.

Source BS

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Buy Larsen, Tata Steel and Tulip Telecom

Larsen & Toubro
Broking House: Edelweiss
Current Price: Rs 1,607.70

Engineering major Larsen & Toubro’s management is bullish on power, oil & gas, infra sectors, which it considers to be growth drivers. The company maintains a guidance of 25-35 per cent YoY growth in order accretion in FY10E, driven by the oil and gas (O&G), power and infrastructure verticals, especially from public sector companies. In infrastructure, L&T is looking at opportunities in the roads, railways and water sectors. L&T has a capex plan of Rs 1,500 crore-Rs 2,000 crore in FY10E. The broking house feels L&T is a default India infrastructure play, with pick-up in government spending and recommends a ‘hold’ position.

Tata Steel
Broking House: Emkay Research
Current Price: Rs 438.30

Tata Steel has reported below estimate results with net sales standing at Rs 26,430 crore, down 26.7 per cent. The company has posted a adjusted net loss at Rs 1,040 crore (yoy profit Rs 1,520 crore) as it had to bear a restructuring cost of Rs 4,090 crore. As per the management, the prices in Europe have bottomed out and there may be technical restocking which may push up the prices. At the same time, Corus is also taking various measures to reduce cost of production. The outlook on Indian operations is optimistic and management has guided for 20-25 per cent volume growth in FY10 and the broking house maintains a “hold”.

Tulip Telecom
Broking House: Angel Broking
Current Price: Rs 897.95

Tulip Telecom Ltd is a data telecom service and IT solutions provider. The company has recorded a 12.8 per cent yoy growth in its Q4FY09 topline, while sequential growth came in at 5.9 per cent. In the IP VPN business, a key growth driver for the company was the increase in bandwidth requirements of its customers, and the business saw strong growth in demand from the media, telecom, the government and manufacturing sectors. The total number of connects grew by an excellent 71.2 per cent yoy and by over 14 per cent qoq, to cross the two lakh figure. Going ahead, the broking house expects Tulip to record CAGRs of 21.6 per cent and 16.7 per cent in its topline and bottomline, respectively, over FY2009-11 and recommends “accumulate” position.

TA - Tata Steel 27-04-09

Tata Steel

Tata Steel too underwent a mild correction in the beginning of the week but it recovered thereafter to end on a flat note.

Momentum indicators in the daily charts are indicating weakness. Short-term resistance for the stock is at Rs 276.

A downward reversal from this level can pull the stock lower to Rs 234 or Rs 212.

Move above Rs 276 will take the stock higher to Rs 297 and then to Rs 341 where the 200-day moving average is poised.

Traders can hold their longs with a stop at Rs 232.

The medium term trend in the stock is up but a sideways move between Rs 240 and Rs 300 is possible for a few more sessions before it breaks out higher to our medium term target of Rs 335 and Rs 360.

— Lokeshwarri SK

businessline 27-04-09

Tisco has jumped quite a bit during the last month and is now ripe for correction.  Adopt a buy on dips strategy and try to acquire and hold at Rs.225-240 levels for a target price of Rs.400 in a years time.

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Technical Analysis - Tata Steel

Tata Steel

Tata Steel rallied strongly in the first two sessions to record a peak at Rs 297 and moved sideways thereafter. Short-term supports for the stock are Rs 250 and Rs 233. Short-term traders can buy in declines above the first support. The stock can then take a shy at the 200-day moving average at Rs 335 and beyond that at Rs 360. However a close below Rs 250 would be a psychological victory from the bears and usher in a medium term correction to Rs 240 and Rs 207.

The medium-term trend is currently up though the stock is appearing stretched on the daily charts. The magnitude of the correction should be closely watched to understand the medium term direction in the stock.

— Lokeshwarri S.K.

businessline 19-04-09

Tata Steel must buy

Tata Steel

Tata Steel put up a strong show in the last two trading sessions of the week to close with a whopping 16 per cent gain.

The stock has already raced to our medium-term target of Rs 250 and oscillators in the daily chart denote that the momentum continues to be strong in the short-term.

As we have been reiterating, the medium-term range for this stock is between Rs 150 and Rs 250.   strong break beyond Rs 250 will give the next medium-term target of Rs 360.

If Tata Steel sustains above Rs 250 over the upcoming week, its short-term targets would be Rs 270 and Rs 318. Traders can buy on declines with a stop at Rs 248.  Next support would be at Rs 238 and Rs 222.

Our View :

Tata Steel is  astrong buy and hold for a week.  All the metal stocks closed higher and there is expansion of volumes which suggests that the uptrend will continue in the next week.  Book full profits around Rs.300 levels

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TA - Tata Steel

Tata Steel too began the week on a nervous note , declining to Rs 192. But the stock rallied thereafter to move higher towards the resistance at Rs 230. If the stock is unable to penetrate this level, it can reverse lower and head towards Rs 200 again. This sideways move will however be construed as a consolidation that can be followed by a break-out towards our medium term target at Rs 250. A close below Rs 190 is needed to mitigate the positive short-term view. The medium-term trend in the stock however continues to be sideways in the range between Rs 150 and Rs 250. As explained last week, the stock needs to record a strong break-out above Rs 250 to pave the way for a rally to Rs 345 or Rs 360. Source : businessline

Technical Analysis - Tata Steel

Tata Steel caught up with its large-cap peers towards the end of the week when
it moved above the resistance band between Rs 184 and Rs 190 on Thursday.

The strong volume accompanying this break-out is a positive signal. The stock
could head towards the upper boundary of the medium-term trading band at Rs 250.

We retain a neutral medium term view for this stock. But a strong break-out
above Rs 250 will give the next resistance in the band between Rs 345 and Rs
360.

Medium-term investors can hold the stock with a stop at Rs 175. Short-term
supports for the stock are at Rs 197 and Rs 187. Fresh longs should be avoided
on a decline below the first support.

Lokeshwarri S. K.
businessline 29-03-09

Market Voices 13-03-09

Today the Indian market witnessed one of the strongest session in recent months. Largecap stocks gained in strength though midcap and smallcap stocks were muted in their gains. Sensex is up 5.3% and Nifty is up 4%. BSE Midcap index was up 0.8%, BSE Smallcap index was up 2.5% over the week. BSE Metals index up 6.7%, BSE Auto index up 6.5%, and BSE Oil & Gas index was up 6.2%.  

It was a cheerful day for the Indian market that closed on a highly positive note. Sensex shut shop at 8756, up 413 points and Nifty at 2719, up 102 points from the previous close. CNX Midcap index was up 2.9% and BSE Smallcap index was up 1.9%. The market breadth was positive with advances at 890 against declines of 202 on the NSE. Top Nifty gainers included DLF, Tata Power and Tata Motors while losers included BPCL, ABB and NTPC.  

Hold long position in RIL, says Rajat Bose, technical analyst, on CNBC TV18. But do not buy at current levels because it is trading near its resistance level of Rs 1320, he adds. The stock is at Rs 1282.35, UP 6.7% on the BSE.  

Hold NTPC with long-term view, says Gaurang Shah of Geojit Financials, on Zee Business. Buy more at Rs 165, he adds. The stock is at Rs 170.20, down 2% on the BSE.  »

Hold Nagarjuna Construction for 12 months, says Sailesh Kanani of Angel Broking on CNBC Awaaz. It will give returns of 80-100%, he adds. The stock is currently trading at Rs 40.50, up 4.1% on the BSE.  

The Indian economy is close to bottoming out and it could turn around by Q4 this year, says Sam Mahtani of F&C Investments on CNBC TV18. He expects the second half of the year to be positive backed by the steep decrease in interest rates and aggressive monetary policy actions that was taken over in the past couple of months.  

Stay invested in Axis Bank, says VK Sharma of Anagram Stock Broking on CNBC TV18. It is one of those stocks in the private sector which has done pretty well, he adds. The stock is currently trading at Rs 330.55, up 8.6% on the BSE. 

Hold long positions in Nifty for target of 2780 and stop loss of 2660, says E Mathew, technical analyst, on CNBC TV18.  

It was a stellar day for the Indian market thanks to excellent global cues. Sensex closed at 8789, up 445 points (provisional) and Nifty at 2725, up 108 points (provisional) from the previous close. CNX Midcap index was up 3.1% and BSE Smallcap index was up 1.9%. The market breadth was positive with advances at 870 against declines of 315 on the NSE. This is the largest point and percentage gain for Nifty since December 10, 2008, says NDTV Profit.  

Buy Sesa Goa on dips, says Ashwani Gujral, technical analyst, on CNBC TV18. It has support at Rs 65 and resistance at Rs 105, he adds. The stock is at Rs 80, up 5.5% on the BSE.  

Go long on Cairn India at Rs 170 with target of Rs 175, says Vijay Bhambwani, technical analyst, on CNBC TV18. Keep stop loss of Rs 167, he adds. The stock is currently trading at Rs 169.70, up 3.95% on the BSE.  

Buy DLF when it goes above Rs 150 with target of Rs 162, 180 and 211, says Prasad Kushe, technical analyst, on CNBC Awaaz. Keep stop loss of Rs 140, he adds. The stock is currently trading at 153, up 11.8% on the BSE.  

Hold Videocon Industries, says Rajesh Jain of SMC Global Securities on Zee Business. It has resistance at Rs 140-150, he adds. The stock is currently trading at Rs 84.50, up 1.8% on the BSE.  

The Indian market is trading firm with the Nifty above the 2700 mark. Commodity stocks are showing strength. The Asian markets closed on a high. Sensex is trading at 8716, up 372 points and Nifty is at 2709, up 92 points from the previous close. CNX Midcap index is up 2.7% and BSE Smallcap index is up 1.8%. The market breadth is positive with advances at 887 against declines of 300 on the NSE.  

Buy DLF on dips, says Sudarshan Sukhani, technical analyst, on CNBC TV18. It is worth taking a long call on this stock, he adds. The stock is currently trading at Rs 151.50, up 10.7% on the BSE.  

Buy Ambuja Cement with target of Rs 75 and 86, says Prasad Kushe, technical analyst, on CNBC Awaaz. Keep stop loss of Rs 63, he adds. The stock is currently trading at Rs 68.80, up 1.6% on the BSE.  

HSBC maintains a buy call on Reliance Industries with target of Rs 1640, reports CNBC Awaaz. It is expected to give returns of 36% from current levels, it adds. The stock is currently trading at Rs 1271.50, up 5.8% on the BSE.  

Hold Chambal Fertilisers with stop loss of Rs 32, says Rajesh Jain of SMC Global Securities on Zee Business. It is trading in the range of Rs 32-42, he adds. The stock is currently trading at Rs 36.10, up 3.1% on the BSE.  

Hold GMR Infra with target of Rs 85, says Rajesh Jain of SMC Global Securities on Zee Business. The stock is currently trading at Rs 71.50, up 3.7% on the BSE.  

Buy Tata Motors with target of Rs 162 and 172, says Prasad Kushe, technical analyst, on CNBC Awaaz. Keep stop loss of Rs 148, he adds. The stock is currently trading at Rs 158.30, up 8.5% on the BSE.  

Buy Dena Bank with target of Rs 36, says Ashwani Gujral, technical analyst, on CNBC Awaaz. Keep stop loss of Rs 28, he adds. The stock is currently trading at Rs 30.85, up 4.1% on the BSE.  

Buy ICICI Bank on dips, says Sudarshan Sukhani, technical analyst, on CNBC TV18. It has a long-term support between Rs 200-250, he adds. The stock is currently trading at Rs 307, up 8% on the BSE.  

The Asian and European markets are trading positive and following the global cues, the Indian market continues to hold up fairly well. Both the largecap and midcap indices are showing good gains. Sensex is trading at 8668, up 324 points and Nifty is at 2695, up 77 points from the previous close. CNX Midcap index is up 2.6% and BSE Smallcap index is up 1.4%.  

Hold HUL which has support at Rs 185 and Rs 210, says Ashu Bagri, technical analyst, on NDTV Profit. It has resistance at Rs 245, he adds. The stock is currently trading at Rs 228.50, up 1.4% on the BSE.  

Exit Indiabulls Real Estate on rally, says Sharmila Joshi of Systematix Shares on NDTV Profit. Invest in some other sector altogether, she adds. The stock is currently trading at Rs 89.60, up 4.7% on the BSE.  

Hold Shree Renuka Sugars with target of Rs 98-100, says Akshita Deshmukh, technical analyst, on CNBC Awaaz. It has support at Rs 75, she adds. The stock is currently trading at Rs 76.75, up 2.1% on the BSE.  

Investors should sell Satyam on rally, says Phani Sekhar of Angel Broking on CNBC Awaaz. There is, however, trading opportunity in this, he adds. The stock is currently trading at Rs 46.60, down 1.3% on the BSE.  

Hold Axis Bank and sell when it reaches Rs 425, says Ashu Bagri, technical analyst, on NDTV Profit. It has support at Rs 220-270 and resistance at Rs 352-396, he adds. The stock is currently trading at Rs 326, up 7.1% on the BSE.  

Hold L&T for 2-3 years, says Gaurang Shah of Geojit Financials on Zee Business. It will give very good returns, he adds. The stock is currently trading at Rs 603, up 4.7% on the BSE.  

Buy Cairn India at its support level of Rs 150, says Sudhanshu Pandey, technical analyst with LKP Shares, on CNBC Awaaz. Sell at Rs 168-170, he adds. The stock is currently trading at Rs 169.80, up 4% on the BSE.  

The Indian market continues to look good and cheerful as the Asian markets surge too. The indices are gaining ground. Banks, IT, realty and metals zoom. Sensex is trading at 8654, up 311 points from its previous close, and Nifty is at 2687, up 68 points. CNX Midcap index is up 2.4% and BSE Smallcap index is up 1.3%. The market breadth is positive with advances at 852 against declines of 302on the NSE.  

Hold Tech Mahindra at current levels, says VK Sharma of Anagram Stock Broking on CNBC TV18. The stock is currently trading at Rs 260 on the BSE.  

Hold Rajesh Export and exit when it reaches Rs 30, says Ashu Bagri, technical analyst, on NDTV Profit. It has support at Rs 19-20, he adds. The stock is currently trading at Rs 22.30, down 0.9% on the BSE. 

Hold Hero Honda with target of Rs 1040, says Akshita Deshmukh, technical analyst, on CNBC Awaaz. Keep stop loss of Rs 935, she adds. The stock is currently trading at Rs 957.60, down 1.5% on the BSE.  » 

Invest in Escorts with long-term view, says Paras Bothra of Ashika Stock Broking on CNBC Awaaz. It will give good returns, he adds. The stock is currently trading at Rs 36.65, down 2.9% on the BSE.  

Hold GVK Power for long term with stop loss of Rs 12, says Gaurang Shah of Geojit Financials on Zee Business. The stock is currently trading at Rs 18.45, up 1.9% on the BSE.  

Buy SBI, Axis Bank and PNB on dips, says Daljeet Kohli of Emkay Shares and Stock Brokers on CNBC Awaaz. These are safe stocks to invest in, he adds.  

Buy Mahindra & Mahindra at Rs 280, says Sudhanshu Pandey, technical analyst with LKP Shares, on CNBC Awaaz. It has resistance at Rs 334, crossing which it might go up to Rs 410, he adds. The stock is currently trading at Rs 352.20, up 7% on the BSE. 

Hold Reliance Capital with stop loss below Rs 274, says Simi Bhaumik, technical analyst, on Zee Business. The stock is currently trading at Rs 303.80, up 7% on the BSE.  

At noon, the market continues to look good, steadying the gains of the day. Most heavyweights are pushing the indices up, except for NTPC which is trading in the red. Sensex is trading at 8625, up 281 points from its previous close, and Nifty is at 2685, up 68 points. CNX Midcap index is up 2.4% and BSE Smallcap index is up 1.4%. The market breadth is positive with advances at 867 against declines of 268 on the NSE.  

Buy Bharti Airtel at current levels but with strict stop loss, says Sudarshan Sukhani, technical analyst, on CNBC TV18. The stock is currently trading at Rs 550.70, up 0.1% on the BSE. 

Buy Satyam at around Rs 38 and hold for 3 years, says Gaurang Shah of Geojit Financials on Zee Business. Stop loss for short term should be Rs 32, he adds. The stock is currently trading at Rs 46.25, down 2.01% on the BSE.  

Buy IDFC on decline at around Rs 40-42, says Paras Bothra of Ashika Stock Broking on CNBC Awaaz. One can get returns of 10%, he adds. The stock is currently trading at Rs 47, up 5.2% on the BSE.  

Sell RIL on rally, says Sudhanshu Pandey, technical analyst with LKP Shares, on CNBC Awaaz. Crucial levels to watch out for are Rs 1260-1280, he adds. The stock is currently trading at Rs 1238, up 3% on the BSE.  

Hold ICICI Bank with stop loss of Rs 248, says Simi Bhaumik, technical analyst, on Zee Business. It has resistance at Rs 330-350, she adds. The stock is currently trading at Rs 305.50, up 7.5% on the BSE..  

Buy Kotak Mahindra Bank at around Rs 230-210 with trading target of Rs 255-260, says Anil Maghnani, technical analyst, on CNBC TV18. Keep stop loss of Rs 205, he adds. The stock is currently trading at Rs 239, up 3.3% on the BSE.  

Hold Rolta India with stop loss of Rs 38, says Simi Bhaumik, technical analyst, on Zee Business. Exit when it reaches Rs 47-50, she adds. The stock is currently trading at Rs 43.35, up 4.8% on the BSE.  

An hour into opening, the market is looking good, holding on to the morning's gain. The Asian markets are rallying, too, with Hang Seng and Nikkei looking rather strong. Sensex is trading at 8584, up 244 points from its previous close, and Nifty is at 2677, up 59 points. CNX Midcap index is up 2.1% and BSE Smallcap index is up 1.5%. The market breadth is positive with advances at 820 against declines of 249 on the NSE.  

Buy Ashok Leyland on dips with stop loss of Rs 15, says Sudhanshu Pandey, technical analyst with LKP Shares, on CNBC Awaaz. It has a crucial level of Rs 17.20, crossing which it might go up to Rs 22, he adds. The stock is currently trading at Rs 17.15, up 3.3% on the BSE.  

Sell Dewan Housing on rally, says Paras Bothra of Ashika Stock Broking on CNBC Awaaz. The company is under pressure at the moment, he adds. The stock is currently trading at Rs 53.65, down 0.6% on the BSE.  

Hold Tata Motors with target of Rs 185-195, says Simi Bhaumik, technical analyst, on Zee Business. Keep stop loss of Rs 135, she adds. The stock is currently trading at Rs 153.60, up 5.2% on the BSE.  

Hold Tata Steel with target of Rs 165-175, says Simi Bhaumik, technical analyst, on Zee Business. The stock is currently trading at Rs 160.80, up 3.1% on the BSE.  

Buy Emco with stop loss of Rs 23, says Anil Singhvi, market expert, on CNBC Awaaz. Traders keep target of Rs 31-32, he adds. Investors can expect returns of 25-30%, he says. The stock is currently trading at Rs 29.40, up 13.1% on the BSE.  

Buy Sesa Goa on decline of 5-10%, says Paras Bothra of Ashika Stock Broking on CNBC Awaaz. The stock is currently trading at Rs 78.80, up 4% on the BSE.  

Go long on Bank Nifty with target of 3525-3550, says Devangshu Dutta, market expert, on CNBC TV18. Keep stop loss of 3375, he adds.  

Sell Wipro on rally at Rs 225 with target of Rs 200, says Anil Singhvi, market expert, on CNBC Awaaz. Keep stop loss of Rs 230, he adds. The stock is currently trading at Rs 215.95, up 1.8% on the BSE.  

Traders should buy equities today, says Sudarshan Sukhani, technical analyst, on CNBC TV18. He feels that buyers could either take profits or carry their position into Monday.  

The market opens on a reasonably good note today, following a rally in the US market. Autos and financial stocks are leading the gains. Sensex is trading at 8563, up 219 points from its previous close, and Nifty is at 2676, up 59 points. CNX Midcap index is up 1% and BSE Smallcap index is up 0.4%. The market breadth is positive with advances at 401 against declines of 58 on the NSE.  

Go long on Nifty Futures with target of 2690, says Devangshu Dutta, market expert, on CNBC TV18. Keep stop loss of 2580, he adds.  

Some covering by Nifty 2500 Put buyers was seen yesterday, says VK Sharma of Anagram Stock Broking on CNBC TV18. The Options data now indicates a neutral view with IVs coming down, he adds. He sees resistance for Nifty at 2680 and feels that a higher closing would lead to a short covering rally.  

There could be a short covering rally in the next few days followed by a collapse, says Anil Maghnani, technical analyst, on CNBC TV18. He sees resistance levels for Nifty at 2650 and 2700 and support at 2410 and 2480.  

The bias is on the upside for the near term given the positive global cues, says Amitabh Chakraborty of Religare Securities on CNBC TV18. He feels that the Nifty can go up to 2700, while the key support is at 2500. There are hopes that the Q3 GDP may be revised upward after the good IIP data, he adds