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India metals and miningBest placed in the region
Rakesh Arora, CFAMacquarie Capital Securities (India) Pvt. Ltd.
Level – 3, Mafatlal Center, Nariman PointMumbai (India) 400021
June 2011
Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc., a registered broker - dealer and member of The Financial Industry Regulatory Authority (“FINRA”). All transactions by U.S. investors involving securities discussed in this report must be effected through Macquarie Capital (USA) Inc., which assumes responsibility in the U.S. for the contents of this report.
This research report has been prepared in whole or part by foreign research analysts. These research analysts are not registered/qualified as a research analyst with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a foreign jurisdiction that have been recognized for these purposes by FINRA.
Please read Disclaimer on Page 44-46
Page 2
Export/GDP - India is a domestic story
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
Singapore
HK
Malaysia
Taiw an
Phillipines
Korea
Indonesia
India
Export/GDP
Why India? Supply-constrained and low costNew supply is coming online: Although India was a net importer of steel, this can change with JSW, Tata and Essar’s new capacity coming online. India will remain a net importer of coal and power deficit at 14.5%.Demand growing – though can’t outpace supply: GDP forecast at 8.5%. Cement demand grew at 7%, and steel demand grew at 6% YTD.Lowest-cost producers: Integrated nature of companies, nearer to market and low labour cost advantage.Free – resources: The Indian government is allocating resources free of cost to whoever is willing to put up employment-generating finishing lines. 20billion t of thermal coal reserves allocated.
Source: CEIC, Macquarie Research, May 2011
GDP growth - India to have more stable growth
-4.0
0.0
4.0
8.0
12.0
16.0
2006 2007 2008 2009 2010 2011E 2012E
India China Korea Malaysia Phillipines
`
Forecast
Page 3
Policy changes to empower growthChanging regulation and policies: Lots of changes proposed with upcoming new mining policy.
Streamlining the process, reducing time taken to allocate
Auction/bidding of ore bodies delineated by government agencies
Controversial change of sharing 26% of mine profits
Linking royalty rates to market prices
Haves and have nots: Most companies are facing intense competition getting resources.This has created a significant divergence in profitability of growth. Most companies have also faced issues with land acquisition, environmental clearances, etc.
Key winners here will likely be companies that already have large resources and that should gain in value once auctioning of government explored mineral deposits starts, as per the new policy.
Page 4
Themes we play onRelatively safe, sound and growing domestic plays: Jindal Steel & Power, Sterlite and Gujarat NRE Coke
Turning around operations: JSW Steel
Costly and we think best avoided: Nalco Based on FY3/12 estimates.
Source: Macquarie Research, May 2011
Valuation Summary on FY3/12PER EV/EBITDA P/BV Debt/Equity ROE
Tata Steel 7.0x 6.2x 1.4x 1.2x 19%JSW Steel 7.9x 5.2x 0.9x 0.6x 11%SAIL 9.8x 7.5x 1.4x 0.2x 15%JSPL 11.2x 9.1x 3.2x 0.8x 33%
Sterlite 7.5x 3.7x 1.2x -0.2x 16%Hindustan Zinc 9.1x 5.0x 2.0x -0.7x 28%Hindalco 8.5x 6.0x 1.2x 0.8x 14%
Nalco 15.7x 9.2x 1.9x -0.4x 12%GNC 5.8x 3.8x 0.8x 0.7x 16%Coal India 18.8x 12.8x 5.7x -1.1x 31%NMDC 13.5x 8.4x 4.2x 0.3x 35%
Page 5
Attractive valuations and strong balance sheets
Most of India’s metal companies have a domestic focus and strong balance sheets.
Source: Macquarie Research, May 2011. Prices as of 31 May 2011.
FY11 FY12 FY13 FY11 FY12 FY13Tata Steel Outperform 582 688 18% 6.4x 7.0x 5.3x 7.6x 6.2x 5.0xJSW Steel Outperform 965 1229 27% 12.5x 7.9x 6.4x 6.8x 5.2x 4.4xSAIL Neutral 145 150 3% 10.5x 9.8x 8.2x 8.3x 7.5x 6.0xJSPL Outperform 656 938 43% 16.3x 11.2x 9.9x 11.3x 9.1x 7.9x
FY11 FY12 FY13 FY11 FY12 FY13Sterlite Outperform 173 234 35% 12.4x 7.5x 6.2x 7.2x 3.7x 2.9xHindustan Zinc Neutral 137 136 -1% 11.8x 9.1x 8.8x 7.8x 5.0x 4.1xHindalco Outperform 198 270 36% 16.2x 8.5x 8.2x 7.4x 6.0x 5.8xNalco Underperform 92 72 -22% 84.7x 15.7x 16.4x 59.0x 9.2x 10.0x
FY11 FY12 FY13 FY11 FY12 FY13GNC Outperform 52 95 83% 11.7x 5.8x 5.0x 8.0x 3.8x 3.1xCoal India Neutral 415 382 -8% 24.1x 18.8x 16.5x 16.1x 12.8x 11.5xNMDC Outperform 270 289 7% 16.5x 13.5x 10.5x 10.4x 8.4x 5.9x
% upside PER EV/EBITDARaw material Reco Price (Rs) TP (Rs)
% upside PER EV/EBITDABase Metals Reco Price (Rs) TP (Rs)
% upside PER EV/EBITDASteel Reco Price (Rs) TP (Rs)
Page 6
Commodity prices – we see continued strength
Source: Macquarie Research, May 2011
Coking coal - supply constraints
129
215
303
236 223
145
300
264
-57%
66%
41%
-13% -10% -6%
88%
-
50
100
150
200
250
300
350
F Y 09 A F Y 10A F Y 11A F Y 12E F Y 13 E F Y 14 E F Y 15E Lo ngte rm
(US$ /t)
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
C o k ing C o a l % change Y o Y
Zinc - long term positive
1,9352,187
2,3262,618
2,453
1,8741,562
2,508
24%
13%6% 8% 4%
-6%
-48%
1,000
1,300
1,600
1,900
2,200
2,500
2,800
F Y09A F Y10A F Y11A F Y12E F Y13E F Y14E F Y15E Lo ngterm
(US$/t)
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Z inc % change Yo Y
Copper – upsides even now
6,1038,139
10,924
7,165 6,8894,850
5,878
10,747
4%
33% 34%
-2%
-33%
-4%
-22%
-
2,000
4,000
6,000
8,000
10,000
12,000
F Y09A F Y10A F Y11A F Y12E F Y13E F Y14E F Y15E Lo ngterm
(US$/t)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
C o pper % change Yo Y
Steel - just enough to meet cost
540
702798 804 777
590
830
797
-35%
30%
14%
0% 1%-3%
33%
-
100
200
300
400
500
600
700
800
900
F Y09A F Y10A F Y11A F Y12E F Y13E F Y14E F Y15E Lo ngterm
(US$/t)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Steel H R C o il % change Yo Y
Aluminium - oversupply remains
1,8662,257
2,535 2,673 2,7832,425
2,230
2,425
-16%
21%
12%
-4%
10%
4%
-15%1,000
1,300
1,600
1,900
2,200
2,500
2,800
3,100
F Y09A F Y10A F Y11A F Y12E F Y13E F Y14E F Y15E Lo ngterm
(US$/t)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
A luminium % change Yo Y
Fines Iron ore - supported by costs
57
129
161 153 143
6585
158-33%
125%
25%
-2% -3% -6%
80%
-
20
40
60
80
100
120
140
160
180
FY09A FY10A FY11A FY12E FY13E FY14E FY15E Longterm
(US$/t)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Fines Iron ore % change YoY
Page 7
Steel – high iron ore prices add to competitive advantage
Demand weak but seems to be stabilizing: Demand was hit by liquidity tightening but now seems to be stabilizing, albeit at a slower pace. Indian steel prices have stabilized post a decline in April and are now at a discount to import parity price.
New supply coming online: However, the Indian steel industry is likely to witness almost 10mnt of capacity addition and slower demand this year, but still should be able to operate at full capacity as gross imports stand at 7–8mnt, which can be substituted.
Raw material advantage: Most companies have captive iron ore that costs US$20–25/t against US$150–160/t CIF China. Advantage of US$180/t of steel.
Key Ideas: Jindal Steel and Power (JSP IN, Rs656, OP, TP: Rs938) and JSW Steel (JSTL IN, Rs965, OP, TP: Rs1,229). We like JSP and JSW Steel, for which our earnings estimates are well above consensus. Tata Steel is a leveraged play on the steel cycle, while SAIL lacks a positive catalyst in the near term and we think can be avoided currently.
Page 8
High demand has led to increasing imports
Source: Company data, Macquarie Research, May 2011
Finished steel imports
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
19911992
19931994
1995
19961997
19981999
20002001
20022003
20042005
2006
20072008
20092010
('000 tonnes)
Capacity additions (FY11 - FY16) - Greenfield capacities in doubt
0
1
2
3
4
5
67
8
9
10
Tata
Ste
el
SA
IL
Ispa
t
JSW
Ste
el
Ess
ar
JSP
L
RIN
L
Bhu
shan
Pos
co
Mitt
al
NM
DC
Oth
ers
EA
F/IF
(mtpa)
Brownfield Greenfield
Steel capacity is not increasing fast enough, with greenfield
capacities remaining in doubt.
India will remain a net importer.
0
10
20
30
40
50
60
70
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
App
aren
t fin
ishe
d st
eel c
onsu
mpt
ion
(MnT
)
Average GDP growth at 7.5%, Apparent steel consumption grew at CAGR of 9.3%
Expected GDP growth at 8.5% and steel consumption growth at 2%
Page 9
Indian steel – offers best selling price5% import duty – gives extra US$25–30/t in realisation and restriction on imports due to hassles inimporting hot rolled coil.
Premium due to domestic shortages – Indian steel prices at 10-15% premium, though have been at a discount lately.
Source: JPC, Macquarie Research, May 2011
This, in addition to lowest cost advantage, has helped profitability
Iron ore Iron ore Iron ore100% 100% 20%
2QFY11 3QFY11 4QFY11 2QFY11 3QFY11 4QFY11 2QFY11 3QFY11 4QFY11330 370 378 106 110 149 126 139 200
0%
Tata Steel (India) JSW SteelCaptive raw material
SAIL
EBITDA/t (US$)
Captive raw material
EBITDA/t (US$)50%
Coking coalCoking coal
EBITDA/t (US$)
Coking coal0%
Captive raw material
Import Landed Vs Domestic HRC Price
-
200
400
600
800
1,000
1,200
1,400
May
-00
Nov
-00
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
(US$/t)
HRB Landed Price (US$/t) Domestic HRC prices ex duties (US$/t)
Page 10
Steel valuations – still look reasonable
Source: Bloomberg, Macquarie Research, May 2011
Tata Steel - 1 Year Fwd P/BV
-
0.5
1.0
1.5
2.0
2.5
3.0
May
-96
May
-97
May
-98
May
-99
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
May
-09
May
-10
1 Yr Fwd P/BV Average PBV
Tata Steel - 1 Year Fwd PER
-2468
101214161820
May
-94
May
-95
May
-96
May
-97
May
-98
May
-99
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
May
-09
May
-10
May
-11
1Yr Fwd PER Average PER
JSW Steel - 1 Year Fwd P/BV
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1 Yr Fwd P/BV Average PBV
JSW Steel - 1 Yr Fwd PER
0.0x10.0x20.0x30.0x40.0x50.0x60.0x70.0x80.0x
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
May
-09
May
-10
May
-11
SAIL - 1 Year Fwd PER
-2468
101214161820
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
1Yr Fwd PER Average PER
SAIL - 1 Year Fwd P/BV
-0.51.01.52.02.53.03.54.04.55.0
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
c
Page 11
Tata Steel (TATA IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
* Book Value excluding goodwill
Source: Bloomberg, May 2011
Source: Bloomberg, Macquarie Research, May 2011
TATA vs Sensex
0
50
100
150
200
250
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11Tata Steel India Sensex
FY08A FY09A FY10A FY11E FY12E FY13EProfit & LossNet sales Rsm 1,315,336 1,473,288 1,023,937 1,171,498 1,314,566 1,352,723 EBITDA Rsm 177,824 181,271 89,798 143,922 174,429 206,861 % margin % 14% 12% 9% 12% 13% 15%PAT Rsm 123,499 49,497 19,354- 89,880 81,896 107,808 EPS Rs 169.0 67.7 20.8- 91.1 83.0 109.3 Balance SheetShareholders' Equity Rsm 396,465 331,869 228,564 355,120 422,464 515,600 Total Debt Rsm 536,247 599,005 530,585 621,843 606,494 591,811 Cash Rsm 53,656 61,484 66,964 109,125 79,781 87,415 Net debt Rsm 473,097 519,755 441,316 512,719 498,827 467,209 Total assets Rsm 921,936 913,550 797,554 1,016,527 1,069,440 1,149,101 Cash flowCash from operations Rsm 134,202 156,959 104,710 14,250 78,988 135,587 Capex Rsm (84,166) (84,337) (71,495) (72,864) (52,669) (72,406) FCF Rsm 50,036 72,622 33,215 58,614- 26,319 63,181
RatiosPER x 3.4x 8.6x -28.0 6.4x 7.0x 5.3xEV/EBITDA x 5.1x 5.2x 10.9x 7.6x 6.2x 5.0xP/BV x 1.1x 1.3x 2.4x 1.6x 1.4x 1.1xBVPS* Rs 543 454 246 360 428 523 Dividend Yield % 2.7% 2.7% 1.4% 1.5% 1.7% 1.9%RoE % 31% 15% -8% 25% 19% 21%Net Debt to Equity x 1.2x 1.6x 1.9x 1.4x 1.2x 0.9x
Tata Steel TATA INRecommendation OutperformTarget price (Rs) 688Current price (Rs) 582 % upside (downside) 18%Market cap (Rsm) 541,257 Market cap (US$m) 12,028
Page 12
Tata Steel – Structural story Raw material integration to increase
Source: Company data, Macquarie Research, May 2011
Plans to double its Indian capacity in next decade
Upgrade to Corus EBITDA with raw material integration India will continue to contribute significantly to earnings
Tata Steel - Raw material integration level
100%
70%
18%
34% 33% 39%46%
22% 27%
48%
21%22%17%16%14% 17%
0%
20%
40%
60%
80%
100%
120%
FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E FY2013E FY2014E
Self suff iciency in iron ore Self sufficiency in coal
Tata Steel (India) - expansions
6.8 6.8 6.8 6.8
3
3 3
3
0
2
4
6
8
10
12
14
16
18
Current JamshedpurPhase II
Orissa Phase I Orissa Phase II
(mtpa)
2012
2015
2014
43
60
77
95
-
20
40
60
80
100
120
Current EBITDA/t 10% integration 20% integration 30% integration
70% 69%
20%26% 26%
1% 3% 3%
77%
1% 2% 1%
0%
20%
40%
60%
80%
100%
120%
FY2011 FY2012E FY2013E
EBIT
DA
(% c
ontr
ibut
ion)
Tata Corus Tata Steel Thailand Natsteel
Page 13
Tata Steel – Corus no longer an overhang
Source: Company Data, Macquarie Research, May 2011
Quarterly earnings have started to see an increase
… as cost pressures easeConsolidated EBITDA will move up
Corus will see an increase in earnings
Tata Steel (consolidated) - cost movement
7% 11% 10% 16% 17%11%
18% 13%15% 16%
19%
19%21%
17% 15%5%
6%4%
4% 4%6%
6%6%
6% 6%
47%36% 41% 37% 36%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY2008 FY2009 FY2010 FY2011E FY2012E
Iron ore Coal Scrap Alloys Employees Energy Freight Other
$82
$116
-$5
$43
$65
$80$91
-20
0
20
40
60
80
100
120
140
FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E
140 134
79
126
145
168178
-
2040
6080
100
120
140160
180200
FY20
08
FY20
09
FY20
10
FY20
11
FY20
12E
FY20
13E
FY20
14E
(US$/t)
$123
$175
$83
$29
-$106
-$52
$37
$94$79
$56$25
$85
-150
-100
-50
0
50
100
150
200
Q1F
Y09
Q2F
Y09
Q3F
Y09
Q4F
Y09
Q1F
Y10
Q2F
Y10
Q3F
Y10
Q4F
Y10
Q1F
Y11
Q2F
Y11
Q3F
Y11
Q4F
Y11
Corus quarterly EBITDA per
ton ($ /T)
Corus – EBITDA per ton now on recovery
Page 14
Quarterly earnings trend
Source: Company Data, Macquarie Research, May 2011
Consolidated will also see increase
Volume expected to recoverRealizations remain stable
Standalone earnings remain strong
8.77.9
6.1 6.05.4
6.4 6.3 6.56.0 5.8 5.7
6.5
0
1
2
3
4
5
6
7
8
9
10
Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11
1039
872
1176
985 956889 926 942 968
1095 11461167
0
200
400
600
800
1000
1200
1400
Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11
$187
$216
$94
$51
$17$40
$120
$182$166 $172
$133
$162
0
50
100
150
200
250
Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11
LHS - EBITDA/t (US$/t)
-
100
200
300
400
500
600
700
1QFY
062Q
FY06
3QFY
064Q
FY06
1QFY
072Q
FY07
3QFY
074Q
FY07
1QFY
082Q
FY08
3QFY
084Q
FY08
1QFY
092Q
FY09
3QFY
094Q
FY09
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
Page 15
JSW Steel (JSTL IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs. Sensex Financial estimates and valuation ratios
* Book Value excluding goodwill
Source: Bloomberg, May 2011
Source: Bloomberg, Macquarie Research, May 2011
0
100
200
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
JSTL India Sensex
JSW Steel JSTL INRecommendation OutperformTarget price (Rs) 1,229 Current price (Rs) 965 % upside (downside) 27%Market cap (Rsm) 229,670 Market cap (US$m) 5,104
FY08A FY09A FY10A FY11E FY12E FY13EProfit & LossNet sales Rsm 123,455 150,314 188,969 234,581 479,238 521,813 EBITDA Rsm 33,673 29,359 40,149 47,118 80,617 98,587 % margin % 27% 20% 21% 20% 17% 19%PAT Rsm 16,589 2,453 14,814 18,377 31,387 38,746 EPS Rs 86.6 13.3 79.2 77.2 122.9 151.7 Balance SheetShareholders' Equity Rsm 80,807 80,771 94,758 198,117 281,451 316,204 Total Debt Rsm 121,362 165,502 161,730 151,730 252,427 257,783 Cash Rsm 4,715 5,093 3,030 34,664 75,072 63,780 Net debt Rsm 111,952. 156,443. 152,418. 91,352. 175,217. 191,865. Total assets Rsm 214,686 259,042 276,138 477,407 749,788 740,221 Cash flowCash from operations Rsm 32,657 47,118 33,613 53,787 82,330 21,573 Capex Rsm (52,443) (59,735) (27,537) (70,000) (79,014) (17,652) FCF Rsm 19,786- 12,617- 6,076 16,213- 3,317 3,922
RatiosPER x 11.1x 72.6x 12.2x 12.5x 7.9x 6.4xEV/EBITDA x 8.7x 11.5x 8.3x 6.8x 5.2x 4.4xP/BV x 2.2x 2.2x 1.9x 1.2x 0.9x 0.8xBVPS* Rs 432 432 507 832 1,102 1,238 Dividend Yield % 1.5% 0.1% 1.0% 1.0% 1.0% 1.0%RoE % 21% 3% 16% 9% 11% 12%Net Debt to Equity x 1.4x 1.9x 1.6x 0.5x 0.6x 0.6x
Page 16
JSW Steel – a turnaround storyExpanding Indian operations, bought Ispat recently Will likely reap synergy benefits despite low raw material integration
JFE deal helped reduce leverage Costs remain a concern with lack of raw material integration
Source: Company data, Macquarie Research, May 2011
JSW Steel - Expansion drive
7 7 710 10
1 1 1
1 13
3 4
3
3
0
5
10
15
20
25
Current FY10E FY11E FY12E Long term
mtpa
Vijaynagar SISCOL Ispat West Bengal Jharkhand
Raw material integration
0%
22%
16%
11%10%
21%17%
0% 0% 0%
12%
5%
-5%
0%
5%
10%
15%
20%
25%
F Y2008 F Y2009 F Y2010 F Y2011 F Y2012 F Y2013
Iro n o re C o king co al
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
FY2010 FY2011E FY2012E FY2013E
Net debt to equity JSW Steel - cost breakup movement
11%18% 15% 15%
22% 25% 23%
38%40% 52%
45%42% 35%
30%
7%7%
6%7%
6%8%
9%8%
6%5%
4%5%
3%4%
24% 20% 17%24% 21% 25% 30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E
Iron ore Coal + coke Energy Freight Employee Others
Page 17
Quarterly earnings trend
Source: Company Data, Macquarie Research, May 2011
Volume growth will play in FY12
And volume of 8.4mtpa to increase in FY12We expect EBITDA of $177/t for India
Standalone earnings at $200/t mark
3.4 3.4
5.7 6.0
8.4
9.4
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E
239
172158
173 177196
-
50
100
150
200
250
300
FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E
JSW Steel (standalone) - quarterly EBITDA/t
-
50
100
150
200
250
300
350
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
(US$/t)
JSW (standalone) EBITDA/t (US$/t)
JSW Steel (standalone) - saleable steel
-0.20.40.60.81.01.21.41.61.82.0
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
(mt)
Page 18
Steel Authority Of India (SAIL IN, Neutral)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
020406080
100120140160
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
Sail India Sensex
SAIL SAIL INRecommendation NeutralTarget price (Rs) 150Current price (Rs) 145 % upside (downside) 3%Market cap (Rsm) 598,908 Market cap (US$m) 13,309
FY08A FY09A FY10A FY11E FY12E FY13EProfit & LossNet sales Rsm 406,719 443,463 420,056 435,867 555,038 649,762 EBITDA Rsm 118,882 92,923 103,230 77,694 91,116 119,961 % margin % 29% 21% 25% 18% 16% 18%PAT Rsm 75,968 62,531 68,465 57,014 61,120 73,353 EPS Rs 18.4 15.1 16.6 13.8 14.8 17.8 Balance SheetShareholders' Equity Rsm 232,873 283,006 337,390 376,856 418,674 470,795 Total Debt Rsm 38,876 86,665 176,379 201,621 271,379 321,379 Cash Rsm 139,331 184,863 227,185 153,037 182,580 200,158 Net debt Rsm (100,454) (98,198) (50,807) 48,584. 88,799. 121,220. Total assets Rsm 287,397 382,955 528,080 593,550 705,656 808,415 Cash flowCash from operations Rsm 123,808 93,564 87,167 57,802 190,957 132,338 Capex Rsm (28,425) (58,324) (104,254) (112,800) (181,090) (103,480) FCF Rsm 95,383 35,240 17,087- 54,998- 9,867 28,858
RatiosPER x 7.9x 9.6x 8.7x 10.5x 9.8x 8.2xEV/EBITDA x 4.2x 5.4x 5.3x 8.3x 7.5x 6.0xP/BV x 2.6x 2.1x 1.8x 1.6x 1.4x 1.3xBVPS* Rs 56 69 82 91 101 114 Dividend Yield % 2.6% 1.8% 2.3% 2.8% 3.4% 4.1%RoE % 33% 22% 20% 15% 15% 16%Net Debt to Equity x -0.4 -0.3 -0.2 0.1x 0.2x 0.3x
Page 19
Changing product mix with capacity expansion …
Coking coal & employee costs will remain an overhangHowever, capacity could be delayed
52%56%
25%28%
2.1
1.3
2.2
3.3
0%
10%
20%
30%
40%
50%
60%
BSP DSP RSP BSL
Ord
ers
left
to b
e pl
aced
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
mn
tons
% left to be ordered capacity increase
SAIL is changing its product mix with new capacity
SAIL product mix (FY10)
Semis20%
Rounds/bars10%
Coated products
3%CRC9%Structurals
5%
HRC23%
Plates21%
Pipes1%
Railw ay materials
8%
SAIL product mix (FY12)
Semis23.3%
Rounds/bars4.8%
Coated products10.4%
CRC15.0%
Structurals7.4%
Railway materials
22.1%
HRC16.4%
Plates0.6%
Pipes0.0%
Source: Bloomberg, Macquarie Research, May 2011
SAIL - cost breakup movement
6% 5% 6% 5% 5% 6%
31%42%
38% 47% 49% 46%
28%24% 17% 18% 16% 15%
FY2008 FY2009 FY2010 FY2011E FY2012E FY2013EIron ore Coal + Coke Employee
Page 20
Quarterly earnings trend
Source: Company Data, Macquarie Research, May 2011
Employee costs play spoilsport
And volume of 14mtpaWe expect EBITDA of $168/t for India
EBITDA much below peers
-
50
100
150
200
250
300
350
400
4QFY
06
2QFY
07
4QFY
07
2QFY
08
4QFY
08
2QFY
09
4QFY
09
2QFY
10
4QFY
10
2QFY
11
4QFY
11
(US$/t)
-
50
100
150
200
250
300
4QFY
06
2QFY
07
4QFY
07
2QFY
08
4QFY
08
2QFY
09
4QFY
09
2QFY
10
4QFY
10
2QFY
11
4QFY
11
(US$/t)
174182
125
168
188
-
20
40
60
80
100
120
140
160
180
200
FY2009 FY2010 FY2011 FY2012E FY2013E
EBITDA per ton
1112 12
14
17
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
FY2009 FY2010 FY2011 FY2012E FY2013E
(mn tons)
Page 21
Jindal Steel & Power (JSP IN, Outperform)Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, May 2011
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
-30
6090
120150
180210
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
JSP India Sensex
FY08A FY09A FY10A FY11E FY12E FY13EProfit & LossNet sales Rsm 54,890 108,518 112,894 131,577 170,671 202,915 EBITDA Rsm 22,101 51,657 58,821 63,702 84,659 96,862 % margin % 40% 48% 52% 48% 50% 48%PAT Rsm 12,740 30,457 35,660 37,480 54,718 61,815 EPS Rs 16.5 39.4 38.3 40.2 58.8 66.4 Balance SheetShareholders' Equity Rsm 38,247 70,243 103,944 140,012 193,318 253,721 Total Debt Rsm 69,961 81,133 86,043 139,879 246,696 332,169 Cash Rsm 6,207 6,694 1,128 32,593 90,597 177,620 Net debt Rsm 62,251. 70,914. 84,360. 106,718. 155,532. 153,982. Total assets Rsm 113,528 158,863 200,325 292,503 453,246 599,582 Cash flowCash from operations Rsm 15,958 38,787 55,747 33,828 79,461 90,944 Capex Rsm (20,426) (37,188) (65,131) (52,769) (124,988) (84,589) FCF Rsm 4,468- 1,599 9,384- 18,941- 45,526- 6,355
RatiosPER x 39.6x 16.7x 17.1x 16.3x 11.2x 9.9xEV/EBITDA x 7.4x 3.3x 11.8x 11.3x 9.1x 7.9xP/BV x 13.2x 7.2x 5.9x 4.4x 3.2x 2.4xBVPS* Rs 50 91 112 150 208 272 Dividend Yield % 0.1% 0.2% 0.2% 0.2% 0.2% 0.2%RoE % 33% 56% 41% 31% 33% 28%Net Debt to Equity x 1.6x 1.0x 0.8x 0.8x 0.8x 0.6x
Jindal Steel & Power JSP INRecommendation OutperformTarget price (Rs) 938 Current price (Rs) 656 % upside (downside) 43%Market cap (Rsm) 610,867 Market cap (US$m) 13,575
Page 22
Jindal Steel & Power – Our top pick in resourcesTripling its steel capacity from current 4.5mtpa to 12mtpa by FY14E.
Five-fold increase in its merchant power capacity from current 1,000MW to 5,400MW by FY15E.
Stable high profitability of its power business even with falling merchant power rates due to declining costs.
Captive coal (nearly 2.5bn tonnes in reserves) is at the heart of competitiveness.
Unique steel-making technology that reduces use of coking coal by 50% vs the BF route.
Has a history of consistently high margins in steel business.
Source: Company data, Macquarie Research, May 2011
Net profit breakup - steel to regain prominence
2%
51%61%
48%
32%24%
98%
49%39%
52%68%
76%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY08A FY09A FY10A FY11A FY12E FY13EPower Steel
JSPL
Mild Steel 4.5mt 1000 MW (250*4 MW)Finished steel 3.25mtPower 628MW
Page 23
Power business – first-mover advantage
Comparative cost of power generationCaptive coal Bought out coal Imported coal
Calorific value Kcal/Kg 4,000 4,000 6,000 Cost Rs/t 600 1,200 5,000 Station heat rate Kcal/unit 2,500 2,500 2,500 Fuel cost Rs/unit 0.38 0.75 2.08
JSPL’s steel business has had consistently the highest margins
among Indian steel names, even
during the steel downturn
Jindal Power has super-normal
returns compared to comparative
firms
We estimate that abnormal
realisations will come down as
competition kicks in
Captive coal key to competitiveness
Source: Company data, Macquarie Research, May 2011
Source: Company data, Macquarie Research, May 2011
Source: Company data, Macquarie Research, May 2011
RoE of various power companies
3%
12%
62%
22% 24%20%19%
15%18% 18%
15% 15% 15% 15% 14%12% 13% 13% 14% 13%14% 15% 16%
20%16%
5% 4%
0%
10%
20%
30%
40%
50%
60%
70%
(%)
ADANI JSW LANCI NATP PWGR TPWR RPWR
Realizations to come down - but enough time to earn dough
4.67
6.33 6.22 6.17
5.12 4.844.08
4.68 4.433.97 4.14
5.69 5.364.50
3.83 3.46 3.20 3.14
-6%
-16%-15%
-10%-7%
-2%
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2QFY
09A
3QFY
09A
4QFY
09A
1QFY
10A
2QFY
10A
3QFY
10A
4QFY
10A
1QFY
11A
2QFY
11A
3QFY
11A
4QFY
11A
FY09
FY10
FY11
A
FY12
E
FY13
E
FY14
E
FY15
E
(Rs/unit)
-18%-16%-14%-12%-10%-8%-6%-4%-2%0%
Blended tarriff % change
EBITDA margins of steel companies
0%5%
10%15%20%25%30%35%40%45%50%
FY02A FY03A FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12E FY13E
(%)
Tata Steel SAIL JSW Steel JSPL (standalone)
Page 24
The steel advantage
Source: Company data, Macquarie Research, May 2011
Tripling its steel capacity from current 3mtpa In line with increases in metallic's capacity
EBITDA per ton is one of the highest amongst its peers Capacity growth is higher than peers
0.0
5.0
10.0
15.0
20.0
25.0
30.0
FY2011 FY2014
Cru
de s
teel
cap
acity
(mill
ion
tons
)TATA JSW JSPL SAIL
Total sponge iron capacity
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E
Total steel capacity
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY2010 FY2011E FY2012E FY2013E FY2014E FY2015E
EBITDA per ton ($/ton)
309 292
429
158 161 163182139 148
297
384 382
0
100
200
300
400
500
FY2010 FY2011 FY2012
JSP JSW SAIL Tata Steel India
Page 25
The steel advantage
Source: Company data, Macquarie Research, May 2011
Steel business is growing Steel margins are improving
Power business will reduce contribution Margins remain strong
3.2
4.7
6.3 6.2 6.2
5.1 4.84.1
4.7 4.44.0 4.1
0.5
2.2
3.13.5 3.6
3.0 2.92.5 2.8 2.6 2.4 2.5
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
Realisation Net Profit per unit
297
439459
440
339
11
168192
230
278
323300
329 343
-50
-
50
100
150
200
250
300
350
400
450
500
3QFY
08
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
EBIT per unit
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
4QFY08 2QFY09 4QFY09 2QFY10 4QFY10 2QFY11 4QFY11-1,0002,0003,0004,0005,0006,0007,0008,000
Power - net sales (Rsm) LHS Power - PAT (Rsm) RHS
0
5,000
10,000
15,000
20,000
25,000
30,000
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Steel - net sales (Rsm) LHS Steel - PAT (Rsm) RHS
Page 26
Non-Ferrous – Volume, volume and volume
Aluminium – the key base metal in India: India currently has capacity of 1.5mt, and the capacity is being increased to 3mt by FY15 by players like Hindalco. The biggest concern is allocation of bauxite and coal mines, which are in the interior of India. Aluminium seems to be peaking out, and we remain cautious to the possibility of unwinding of inventory as interest rate cycle reverses. Hindalco, with 65% of earnings coming from the rolling business, remains our hedged play on aluminium.
Copper – lack of concentrate: India continues to import concentrate due to a lack of availability.
Zinc – low cost expansions: India is one of the lowest cost producers of zinc, and capacity expansion by Hindustan Zinc has increased capacity from 600kt to 850kt. We think zinc prices have corrected quite a bit and are near the marginal cost of production.
Key ideas: Sterlite (STLT IN, Rs173, OP, TP: Rs234). Our preferred play on zinc is Sterlite, which has other catalysts too.
Page 27
Sterlite Industries (STLT IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
50
100
150
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
Sterlite India Sensex
Sterlite Industries STLT INRecommendation OutperformTarget price (Rs) 234 Current price (Rs) 173 % upside (downside) 35%Market cap (Rsm) 581,557 Market cap (US$m) 12,923
FY09A FY10A FY11E FY12E FY13E FY14EProfit & LossNet sales Rsm 212,993 245,516 302,596 439,139 558,958 573,192 EBITDA Rsm 44,537 60,180 74,784 138,757 165,772 179,115 PAT Rsm 31,921 37,907 46,755 77,602 94,406 96,273 EPS Rs 45.1 45.1 13.9 23.1 28.1 28.6
Balance SheetShareholders' Equity Rsm 256,132 370,120 410,340 470,398 547,936 622,940 Total Debt Rsm 70,143 92,600 194,100 229,600 236,600 243,600 Cash Rsm 55,048 33,378 1,241 64,274 94,459 206,968 Total assets Rsm 408,483 562,340 716,260 836,380 951,232 1,065,771
Cash flowCash from operations Rsm 58,382 41,817 147,799 202,325 263,402 201,821 Capex Rsm (53,403) (68,980) (123,544) (42,723) (40,127) (42,904) FCF Rsm 4,980. (27,163) 24,255. 159,603. 223,275. 158,917.
RatiosPER x 3.8x 3.8x 12.4x 7.5x 6.2x 6.0xEV/EBITDA x -0.0 7.7x 7.2x 3.7x 2.9x 2.1xP/BV x 0.5x 0.4x 1.4x 1.2x 1.1x 0.9xBVPS Rs 362 440 122 140 163 185 Net cash/share Rs 173 144 13 22 28 59 Dividend Yield % 2.0% 2.2% 0.6% 0.7% 0.7% 0.7%RoE % 12% 10% 11% 16% 17% 15%RoA % 11% 10% 9% 12% 13% 12%Net Debt to Equity x -0.5 -0.3 -0.1 -0.2 -0.2 -0.3
Page 28
Sterlite – Increasing capacityHad planned increase in aluminium capacity … … and has delivered on increase in zinc capacity
Which will help increase profits as wellSetting up power capacity
Source: Bloomberg, Macquarie Research, May 2011
Zinc Expansion Plans
411,000
669,000
170,000 170,000
88,000
210,000
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
2007 Chanderiya II Debottlenecking Current FY11
Tonnes pa
Vedanta - Emerging aluminium giant
360 355245
408570 570
82 264
400
450 450
0
200
400
600
800
1000
1200
Current FY2009 FY2010 FY11 FY12 FY13
(Ktpa)
Sterlite Industries (Korba) Vedanta Aluminium
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY2011 FY2012 FY2013 FY2014
MW
11.313.3
19.1
22.9
-
5.0
10.0
15.0
20.0
25.0
2010 2011E 2012E 2013E
Rs/ share
Page 29
Sterlite – power contribution expected to remain muted
Power business - tariff assumptions
Source: Company data, Macquarie Research, May 2011
Source: Company data, Macquarie Research, May 2011
FY11
Copper7%
Anglo6%
Power2% Aluminium
14%
Hindustan Zinc71%
FY2012
Copper6%
Power14%
Aluminium13%
Hindustan Zinc53%
Anglo14%
FY 2013
Copper7%Anglo
12%
Power18%
Aluminium18%
Hindustan Zinc45%
FY2010 FY2011 FY2012 FY2013 FY2014Sales on PPA basis 25% 25% 25% 25% 25%PPA tariff (Rs/ Kwh) 2.40 2.40 2.60 2.60 2.60Sales on Merchant basis 75% 75% 75% 75% 75%Merchant tariff (Rs/ Kwh) 6.00 3.70 3.50 3.50 3.00 % change -38% -5% 0% -14%Tariff for 2400 MW(Rs/Kwh) 5.10 3.38 3.28 3.28 2.90
Page 30
Hindustan Zinc (HZ IN, Neutral)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
50
100
150
200
250
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11
HZ India Sensex
FY09A FY10A FY11E FY12E FY13E FY14EProfit & LossNet sales Rsm 56,803 80,170 99,121 126,142 130,041 131,662 EBITDA Rsm 27,342 46,701 54,957 73,613 74,172 72,891 PAT Rsm 33,582 50,141 59,596 79,913 82,543 84,243 EPS Rs 64.6 95.6 11.6 15.1 15.6 16.0
Balance SheetShareholders' Equity Rsm 143,576 181,240 225,318 284,321 345,428 407,895 Total Debt Rsm 87 605 605 605 605 605 Cash Rsm 191 275 40,169 100,838 164,692 229,950 Total assets Rsm 149,251 188,957 233,035 292,038 353,145 415,612
Cash flowCash from operations Rsm 27,127 40,772 65,605 85,272 88,984 90,729 Capex Rsm (34,191) (38,815) (10,000) (3,500) (3,500) (3,500) FCF Rsm (7,065) 1,958. 55,605. 81,772. 85,484. 87,229.
RatiosPER x 2.1x 1.4x 11.8x 9.1x 8.8x 8.6xEV/EBITDA x -0.4 -1.1 7.8x 5.0x 4.1x 3.3xP/BV x 0.4x 0.3x 2.6x 2.0x 1.7x 1.4xBVPS Rs 340 429 53 67 82 97 Net cash/share Rs 164 258 35 50 65 80 Dividend Yield % 2.9% 4.4% 0.7% 0.7% 0.7% 0.7%RoE % 23% 28% 26% 28% 24% 21%RoA % 23% 27% 26% 27% 23% 20%Net Debt to Equity x -0.5x -0.6x -0.7x -0.7x -0.8x -0.8x
Hindustan Zinc HZ INRecommendation NeutralTarget price (Rs) 136 Current price (Rs) 137 % upside (downside) -1%Market cap (Rsm) 578,869 Market cap (US$m) 12,864
Page 31
Hindalco Industries (HNDL IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
50
100
150
200
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
Hindalco India Sensex
FY09A FY10A FY11E FY12E FY13E FY14EProfit & LossNet sales Rsm 662,678 607,221 712,815 839,503 841,641 862,168 EBITDA Rsm 54,682 85,643 77,520 107,318 117,915 119,891 PAT Rsm 23,068 32,992 26,325 44,474 46,146 45,194 EPS Rs 13.5 17 12.3 23.2 24.1 23.6
Balance SheetShareholders' Equity Rsm 158,536 215,446 290,232 327,981 367,403 403,630 Total Debt Rsm 283,098 239,987 276,920 325,607 368,725 358,145 Cash Rsm 21,918 21,954 25,563 7,544 3,940 16,274- Total assets Rsm 482,070 512,187 626,918 713,354 795,893 821,540
Cash flowCash from operations Rsm 45,812 49,321 57,614 85,672 105,073 109,116 Capex Rsm (26,747) (42,756) (75,083) (128,302) (124,465) (86,982) FCF Rsm 19,065. 6,564. (17,470) (42,630) (19,392) 22,135.
RatiosPER x 14.6x 11.5x 16.2x 8.5x 8.2x 8.4xEV/EBITDA x 10.2x 6.3x 7.4x 6.0x 5.8x 5.8xP/BV x 2.1x 1.8x 1.3x 1.2x 1.0x 0.9xBVPS Rs 93 113 152 171 192 211 Net cash/share Rs (128) (83) (102) (137) (161) (166) Dividend Yield % 0.7% 0.7% 0.8% 1.5% 1.5% 2.0%RoE % 15% 15% 9% 14% 13% 11%RoA % 5% 7% 5% 7% 7% 6%Net Debt to Equity x 1.4x 0.7x 0.7x 0.8x 0.8x 0.8x
Hindalco HNDL INRecommendation OutperformTarget price (Rs) 270 Current price (Rs) 198 % upside (downside) 36%Market cap (Rsm) 378,913 Market cap (US$m) 8,420
Page 32
Hindalco – sizable expansion, resources in place
Novelis recovery aided by end of old price ceiling contracts and cost cutting.
Hindalco looking to triple its aluminium capacity to 1.5mtpa. Has been allocated 200mnt of bauxite and coal.
Funding issues settled, but might need some more debt to complete the capex.
Source: Company data, Macquarie Research, May 2011
Source: Company data, Macquarie Research, May 2011 Source: Company data, Macquarie Research, May 2011
Expected alumina capacity
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Current capacity Utkal Aditya
('000 tonnes)
End 2014
FY2013
Expected aluminium capacity
503,000
359,000
359,000
52000 359000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
Currentcapacity
Mahan Aditya Brownfield Jharkhand
(tonnes)
2HFY12
FY2014
4QFY122015
Novelis - Adjusted EBITDA/ tonne
$165
$290$263
$323$353
$393
$333$363
$197$230
$109
$197
$81
$179
$289$307
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
1QFY
08
2QFY
08
3QFY
08
4QFY
08
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
US$
Adjusted EBITDA / tonne (US$/t)
Page 33
National Aluminium (NALCO IN, Underperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
50
100
150
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11Nalco India Sensex
FY09A FY10A FY11E FY12E FY13E FY14EProfit & LossNet sales Rsm 50,945 50,557 59,585 69,736 72,040 76,270 EBITDA Rsm 16,939 9,961 15,389 21,024 20,075 21,373 PAT Rsm 12,722 8,144 11,202 15,114 14,445 15,352 EPS Rs 4.9 3.2 1.1 5.9 5.6 6.0
Balance SheetShareholders' Equity Rsm 97,698 103,956 111,646 124,553 136,146 148,001 Total Debt Rsm - - - - - - Cash Rsm 28,690 31,437 39,982 44,709 36,944 47,777 Total assets Rsm 103,912 110,562 118,581 131,487 143,080 154,936
Cash flowCash from operations Rsm 26,204 14,636 23,257 23,649 24,658 25,569 Capex Rsm (22,111) (6,776) (5,791) (10,570) (23,700) (5,000) FCF Rsm 4,094. 7,860. 17,466. 13,079. 958. 20,569.
RatiosPER x 18.6x 29.1x 84.7x 15.7x 16.4x 15.4xEV/EBITDA x 12.3x 20.6x 59.0x 9.2x 10.0x 8.9xP/BV x 2.4x 2.3x 8.5x 1.9x 1.7x 1.6xBVPS Rs 38 40 11 48 53 57 Net cash/share Rs 11. 12. 4. 17. 14. 19. Dividend Yield % 5.4% 2.7% 3.0% 0.8% 1.1% 1.4%RoE % 13% 8% 10% 12% 11% 10%RoA % 12% 7% 9% 11% 10% 10%Net Debt to Equity x -0.3 -0.3 -0.4 -0.4 -0.3 -0.3
Nalco NACL INRecommendation UnderperformTarget price (Rs) 72 Current price (Rs) 92 % upside (downside) -22%Market cap (Rsm) 237,106 Market cap (US$m) 5,269
Page 34
Nalco – looking expensive and no triggersExtremely expensive: Trading at a 20x PER on FY11E. Even on P/B, we think it is difficult to justify 2x given the single-digit return on equity.
Capacity enhancement at wrong time: Capacity increasing by 30%, when aluminium prices are near cost of production.
Future expansions are prohibitively expensive: Nalco’s future smelters and refineries are coming up at almost double the cost of its Indian competitors.
Source: Bloomberg, Macquarie Research, May 2011
Page 35
Coking coal – Lack of resources
Steel production growth to drive demand: India’s steel demand is expected to grow by more than 10% in the next few years, and the coking coal requirement will increase from 25mt currently to 45mt by FY13E.
Supply shortfall: Domestic supply is not increasing in line, resulting in a shortfall of close to 30-35mt, which will have to be sourced from imports.
Global prices to remain strong: The $300/t FOB Australia settlement represents a premium over cost support and short supply due to floods in Australia. This also is reflecting the goodwill toward coking coal and the ‘supply risk’ premium. We expect prices to remain strong as global steel production recovers.
Key Ideas: Gujarat NRE Coke (GNC IN, Rs52, OP, TP: Rs95)
Page 36
Gujarat NRE Coke (GNC IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
0
20
40
60
80
100
120
140
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
GNC India Sensex
cc
Gujarat NRE Coke GNC INRecommendation OutperformTarget price (Rs) 95 Current price (Rs) 52 % upside (downside) 83%Market cap (Rsm) 25,896 Market cap (US$m) 575
FY08A FY09A FY10A FY11E FY12E FY13EProfit & LossNet sales Rsm 8,871 15,226 14,399 18,327 29,510 34,317 EBITDA Rsm 2,051 3,871 1,126 6,219 12,870 15,141 PAT Rsm 1,392 888 169 2,437 4,932 5,687 EPS Rs 3.1 5.0 0.4 4.4 9.0 10.3
Balance SheetShareholders' Equity Rsm 16,946 16,893 17,313 23,291 31,218 37,523 Total Debt Rsm 7,843 14,882 19,571 28,296 30,028 27,454 Cash Rsm 2,401 1,236 1,629 4,543 7,241 5,888 Total assets Rsm 26,785 34,123 39,401 54,736 64,504 68,259
Cash flowCash from operations Rsm 2,470 360- 798- 1,404- 4,747 9,158 Capex Rsm (15,617) (6,215) (8,302) (10,640) (6,805) (4,378) FCF Rsm (13,147) (6,575) (9,100) (12,044) (2,058) 4,781.
RatiosPER x 16.9x 10.4x 140.1x 11.7x 5.8x 5.0xEV/EBITDA x 11.2x 9.9x 38.9x 8.0x 3.8x 3.1xP/BV x 1.0x 1.5x 1.5x 1.1x 0.8x 0.7xBVPS Rs 50 36 35 47 63 75 Net cash/share Rs (16) (29) (36) (48) (46) (43) Dividend Yield % 5.9% 2.2% 2.5% 2.0% 1.4% 1.4%RoE % 8% 5% 1% 10% 16% 15%RoA % 5% 3% 0% 6% 11% 12%Net Debt to Equity x 0.3x 0.8x 1.0x 1.0x 0.7x 0.6x
Page 37
Gujarat NRE Coke – story of backward integrationIndia’s largest independent LAM coke producer: GNC is India’s largest non-captive producer of low-ash metallurgical coke with a total capacity of 1mtpa.
Backward integration: To escape the volatility of processing margins, the company acquired coking coal mines (only raw material) in NSW, Australia.
Reserves of ~650mt: The mines contain nearly 650mt of primary hard coking coal, which are still in scarcity and whose prices went up more than three times last year.
Source: Company data, Macquarie Research, May 2011
Indian Operations FY09A FY10A FY11E FY12E FY13 FY14 FY15Indian Operations
Coke capacity tonnes 1.01 1.13 1.26 1.26 1.26 2.01 2.01 Coke production volume tonnes 0.77 0.70 0.70 0.94 1.04 1.20 1.50 Coke sales volume tonnes 0.70 0.75 0.75 0.94 1.04 1.20 1.50 Coke realization US$/ tonne 329 274 394 437 393 402 367 Raw coal consumption tonnes 1.01 1.11 1.11 1.42 1.55 1.57 1.96
EBITDA Rsmn 3,431 1,724 2,799 2,755 3,281 2,922 3,839 yoy 30% -50% 62% -2% 19% -11% 31%
Australian Operations FY09 FY10 FY11 FY12 FY13 FY14 FY15ROM coking coal productionm tonnes 0.80 1.10 1.70 2.50 3.10 4.00 5.60Coking coal production m tonnes 0.56 0.77 1.19 1.75 2.17 2.80 3.92ROM coking coal realizatioUS$/ tonne 176 101 165 195 170 174 156 Mine Operating cost AUD/t 197 135 116 121 111 113 113
PAT A$mn -9 -12 63 162 168 258 298 yoy % nmf 158% 3% 54% 15%
Page 38
Coal India (COAL IN, Neutral)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
COAL vs Sensex
90
95
100
105
110
07-M ay-11 11-M ay-11 15-M ay-11 19-M ay-11 23-M ay-11 27-M ay-11
COAL India Sensex
FY09A FY10A FY11E FY12E FY13E FY14EProfit & LossNet sales Rsm 409,449 473,606 514,868 600,421 677,682 755,372 EBITDA Rsm 24,112 102,363 134,619 165,003 214,480 213,122 PAT Rsm 20,792 96,307 108,670 139,565 186,563 193,575 EPS Rs 3 15 17 22 30 31
Balance SheetShareholders' Equity Rsm 191,651 257,952 333,172 457,195 606,446 738,807 Total Debt Rsm 21,485 20,869 15,535 10,535 5,535 5,535 Cash Rsm 296,950 390,778 458,573 505,427 654,272 793,297 Total assets Rsm 223,984 293,770 365,243 484,265 628,516 760,877
Cash flowCash from operations Rsm 117,194 105,956 120,763 114,316 231,378 235,460 Capex Rsm (18,746) (19,804) (30,000) (46,500) (40,000) (35,000) FCF Rsm 98,447. 86,152. 90,763. 67,816. 191,378. 200,460.
RatiosPER x 126.1x 27.2x 24.1x 18.8x 14.1x 13.5xEV/EBITDA x 96.7x 21.9x 16.1x 12.8x 9.1x 8.6xP/BV x 13.7x 10.2x 7.9x 5.7x 4.3x 3.5xBVPS Rs 30 41 53 72 96 117 Net cash/share Rs 46. 61. 72. 80. 104. 126. Dividend Yield % 0.7% 0.8% 0.8% 1.1% 1.4% 1.5%RoE % 11% 37% 33% 31% 31% 26%RoA % 9% 33% 30% 29% 30% 25%Net Debt to Equity x -1.5 -1.5 -1.4 -1.1 -1.1 -1.1
Coal India COAL INRecommendation NeutralTarget price (Rs) 382 Current price (Rs) 415 % upside (downside) -8%Market cap (Rsm) 2,621,291 Market cap (US$m) 58,251
Page 39
Coal India – Igniting India with CoalCoal India Limited (CIL) is the world’s largest coal company and India’s largest corporate employer, with nearly 400k employees. It has total coal resources of over 65bn tonnes. It has been producing at a CAGR of 5.5% for the past decade and is expected to fuel India with 454mt of coal in FY12.While we like the assets of Coal India, we are maintaining our Neutral rating. There could be downside risk to earnings if Coal India is not allowed to increase prices in view of rising inflation.CIL management has been very categorical in maintaining that it will increase prices only to maintain margins. The recent price increase was to prepare for the upcoming cost increase due to the upcoming 5yr wage agreement. So any expectations for a coal price hike for the next 12-15 months looks very optimistic. We are building in US$8.3/t and a 31% margin, and we are slightly lower than consensus.CIL is now holding 70mnt of inventory, which is well above the 45mnt on normalised basis. Every 10mnt increase in sales is a small 2.5% increase in profits. We seriously doubt Indian railways’ ability to provide more rakes to lift coal, as they already have to increase rakes for the increase in production projected for FY12. In a worst-case scenario, some of this coal can catch fire and could be lost, as post monsoon, moisture trapped in the coal heaps acts as catalyst for ignition when the sun heats it up.
Source: Company data, Macquarie Research, May 2011
Page 40
Production and despatch numbers will continue to increase
Source: Company data, Macquarie Research, May 2011
And increase in realisations should help increase margins
0
100
200
300
400
500
600
FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Coal Production (mt) % Change YoY
0
100
200
300
400
500
600
FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E0%
1%
2%
3%
4%
5%
6%
7%
Coal Sales (mt) % Change YoY
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E0%
2%
4%
6%
8%
10%
12%
Blended price (Rs/t) % Change YoY
0
100
200
300
400
500
600
FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E-50%
0%
50%
100%
150%
200%
250%
300%
350%
EBITDA (Rs/t) % Change YoY
Page 41
Iron Ore – Exports to recover
Reserves of 22bn tonnes. India produces close to 220m tonnes per year, and about 50% of iron ore production is exported annually from India, with China being the biggest consumer.
Exports have been weak but will recover: Exports have been low due to monsoons as well as the ban imposed by Karnataka on transport of ore for exports. However, as a resolution is reached between iron ore exporters and the government, we expect exports will recover.
Medium term: We remain positive on iron ore as we believe steel production will remain strong and demand for iron ore will see growth.
Key Idea: NMDC (NMDC IN, Rs270, OP, TP: Rs289)
Page 42
NMDC (NMDC IN, Outperform)
Source: Bloomberg, May 2011
Key share data and performance vs Sensex Financial estimates and valuation ratios
Source: Bloomberg, Macquarie Research, May 2011
Source: Bloomberg, May 2011
NMDC vs Sensex
-
50
100
150
200
250
300
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
NMDC India Sensex
cc
NMDC NMDC INRecommendation OutperformTarget price (Rs) 289 Current price (Rs) 270 % upside (downside) 7%Market cap (Rsm) 1,070,469 Market cap (US$m) 23,788
FY09A FY10A FY11A FY12E FY13E FY14EProfit & LossNet sales Rsm 75,640 62,391 113,856 132,421 173,728 191,875 EBITDA Rsm 58,372 44,298 86,631 99,393 131,795 145,354 % margin % 77% 71% 76% 75% 76% 76%PAT Rsm 43,496 34,293 65,159 79,130 101,629 110,161 EPS Rs 11 9 16 20 26 28 Balance SheetShareholders' Equity Rsm 116,277 142,724 192,626 253,229 331,062 415,429 Total Debt Rsm - - - - - - Cash Rsm 97,410 128,549 172,281 231,332 290,571 358,087 Net debt Rsm (98,118) (129,311) (173,637) (232,689) (291,928) (359,444) Total assets Rsm 116,864 143,573 193,655 254,257 332,091 416,458 Cash flowCash from operations Rsm 97,410 128,549 174,352 231,332 290,571 358,087 Capex Rsm 1,246. 2,523. 1,140. 4,332. 5,000. 20,000. FCF Rsm 98,656 131,073 175,492 235,664 295,571 378,087
RatiosPER x 24.6x 31.2x 16.5x 13.5x 10.5x 9.7xEV/EBITDA x 16.7x 21.2x 10.4x 8.4x 5.9x 4.9xP/BV x 9.2x 7.5x 5.6x 4.2x 3.2x 2.6xBVPS* Rs 29 36 49 64 84 105 Dividend Yield % 0.8% 0.6% 1.2% 1.5% 1.9% 2.1%RoE % 44% 26% 39% 35% 35% 30%Net Debt to Equity x -0.8 -0.9 -0.9 -0.9 -0.9 -0.9
Page 43
Production (mt) – expected to increase by 100% in the next 5 years
Strength in iron ore prices have helped margins and earnings
The discount to global pricing limits downside
Source: Company Data, Macquarie Research, May 2011
Page 44
Important disclosures:
Financial definitions
All "Adjusted" data items have had the following adjustments made:
Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expenseExcluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests
EPS = adjusted net profit /efpowa*ROA = adjusted ebit / average total assetsROA Banks/Insurance = adjusted net profit /average total assetsROE = adjusted net profit / average shareholders fundsGross cashflow = adjusted net profit + depreciation*equivalent fully paid ordinary weighted average number of shares
All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Volatility index definition*This is calculated from the volatility of historic price movements.
Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.
High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.
Medium – stock should be expected to move up or down at least 30-40% in a year.
Low–medium – stock should be expected to move up or down at least 25-30% in a year.
Low – stock should be expected to move up or down at least 15-25% in a year.
* Applicable to Australian/NZ stocks only
Recommendation – 12 months
Note: Quant recommendations may differ from Fundamental Analyst recommendations
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark returnNeutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe
Outperform – expected return >+10%Neutral – expected return from -10% to +10%Underperform – expected <-10%
Macquarie First South - South Africa
Outperform – return > 10% in excess of benchmark returnNeutral – return within 10% of benchmark returnUnderperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Recommendation proportions – For quarter ending 31 March 2011
13.11%35.73%51.16%
EUR
(for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)(for US coverage by MCUSA, 17.55% of stocks covered are investment banking clients)(for US coverage by MCUSA, 14.36% of stocks covered are investment banking clients)
4.66%26.43%68.91%
CA
3.89%10.45%15.28%14.86%Underperform53.09%29.85%19.00%39.49%Neutral43.02%59.70%65.72%45.65%Outperform
USARSAAsiaAU/NZ
Page 45
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Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group
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SALESUSGreg Coleman (212) 231 2567Karen Acierno (303) 952 2730Karen Blando (212) 231 2515Larry Busnardo (303) 952 2750Michael Cagney (312) 660 9144Will Cape (312) 660 9051David Chambers (212) 231 2505Brian Cohen (212) 231 8002Wes Dalton (415) 762 5007Peter Doerr (312) 660 9052John Donaldson (212) 231 8026Eddie Friedmann (212) 231 8011Roni Gudell (617) 598 2504Grant Hall (617) 598 2507Jay Kreske (312) 660 9041 Brian McGeough (212) 231 2615Heidi Muccifori (212) 231 2466Bruce Murdock (212) 231 8025Todd Pigott (212) 231 8007Susan Reid (416) 848 3558Jack Rose (415) 762 5002Richard Sears (212) 231 2489Blair Smith (212) 231 8004Mark Swank (212) 231 2415Ben Taylor (415) 762 5025Eric Wellmann (617) 598 2506
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