Equity Research INDIA

October 9, 2019
BSE Sensex: 37532 Metals
ICICI Securities Limited
is the author and No respite in sight
distributor of this report
Q2FY20 witnessed pricing weakness across the ferrous space. Lower domestic
demand has led to higher exports further impacting margins. EBITDA for the
ferrous players is expected to decline 25-50% YoY. Jindal Steel and Power (JSPL)
is the only steel player that witnessed volume growth (10% YoY) during the
quarter. Non-ferrous players could not fare any better as LME prices dropped
Q2FY20 results preview
further – with aluminium and copper prices down 6.2% and 4.9% QoQ respectively.
We expect Hindalco’s aluminium volumes to be flat QoQ and copper volumes to
increase as Q1FY20 exerted a shutdown effect. Vedanta’s zinc (India +
international) operations suffered due to lower LME prices while Cairn’s
production can only improve in Q3FY20 and onward. NMDC witnessed 13% YoY
volume decline due to heavy rains in Chhattisgarh and continued closure of
Donimalai mines. Maintain BUY on NMDC and JSPL.
 Q2FY20 witnessed significant pricing weakness in ferrous pack. We forecast
stable QoQ volumes for all the steel players under our coverage. This, coupled with
~Rs4,000-5,000/te pricing realisation decline, leads to an extremely muted
EBITDA/te performance for the ferrous pack, with a QoQ decline of 21-28% expected
in the same. Demand headwinds continued in Q2FY20 with subdued volumes across
the board. We feel domestic demand weakness can perhaps help incumbents to be
more realistic about the country’s longer term demand potential.
 Subdued zinc and oil & gas operations reflect in Vedanta’s weak quarterly
performance. Vedanta’s zinc (India and international) operations felt the impact of
lower LME prices (down 15% QoQ). Average Brent prices declined 8% QoQ leading
to a 5% drop in the company’s oil & gas EBITDA. While LME aluminium prices
continued to be down QoQ, Vedanta’s continuous cost-control measures and lower
alumina prices are expected to limit any contraction in aluminium EBITDA. Copper
business continues to be shut while steel operations during the quarter should
be weak in line with the external environment.
 Higher copper earnings for Hindalco to offset lower integrated aluminium
earnings. Copper volumes are expected to be higher QoQ (Q1FY20 had a
production shutdown in the smelter), which should lead to 14% QoQ increase in
EBITDA, despite lower LME prices. Management expects 1-2% full-year volume
growth for Novelis. For Q2FY20, volumes are likely to be up 5% YoY and EBITDA
margin slightly down at US$423/te.
 NMDC (BUY) witnessed low volumes during Q2FY20. The company’s EBITDA is
expected to decline 14% and volumes to shrink 33% YoY.
Quarterly estimates
Net Sales EBITDA PAT
JAS’19* % chg JAS’19* % chg JAS’19* % chg
(Rs mn) (YoY) (QoQ) (YoY) (QoQ) (YoY) (QoQ)
Tata Steel 3,45,723 (20.6) (3.8) 45,675 (48.8) (15.1) 5,564 (81.8) (11.8)
Research Analysts: JSW Steel 1,86,559 (13.4) (5.8) 28,889 (41.1) (22.3) 6,243 (70.1) (39.2)
JSPL 81,952 (17.9) (17.6) 16,234 (26.5) (25.3) (3,906) NA 346.9
Abhijit Mitra Vedanta 2,05,367 (10) (3.9) 45,572 (11) (12.3) 4,881 (64) (64)
abhijit.mitra@icicisecurities.com
+91 22 6637 7289 Hindustan Zinc 46,826 (2.0) (6.1) 20,126 (13.8) (18.7) 15,277 (15.8) (13.4)
Hindalco # 1,05,333 (2.8) 4.8 9,285 (14.9) 29.4 1,884 (38.9) 734.5
Rohan Jain
rohan.jain@icicisecurities.com NMDC 21,902 (10.2) (32.9) 10,885 (13.6) (41.7) 7,124 11.9 (39.6)
+91 22 6637 7510 Total 9,93,661 (14.2) (5.7) 1,76,666 (31.7) (17.9) 37,068 (60.3) (37.1)
JAS: Jul-Sept 2019; # standalone

Please refer to important disclosures at the end of this report

Metals ICICI Securities
Table 1: I-Sec estimates vis-à-vis consensus
Sales EBITDA
(Rs mn)
FY20E FY21E FY20E FY21E
Tata Steel
I-Sec estimates 16,00,700 16,45,254 2,37,829 2,40,909
Consensus estimates 15,63,000 15,94,000 2,33,423 2,52,267
Variation (%) 2.4 3.2 1.9 -4.5

JSW Steel
I-Sec estimates 8,44,677 9,18,043 1,42,603 1,54,602
Consensus estimates 8,13,551 9,20,705 1,58,278 1,85,760
Variation (%) 3.8 -0.3 -9.9 -16.8

JSPL
I-Sec estimates 4,07,583 4,36,874 92,177 99,175
Consensus estimates 4,02,234 4,25,197 81,779 89,774
Variation (%) 1.3 2.7 12.7 10.5

Vedanta
I-Sec estimates 9,65,655 14,42,121 2,41,473 3,13,730
Consensus estimates 9,03,729 9,55,220 2,51,751 2,78,019
Variation (%) 6.9 51.0 -4.1 12.8

Hindustan Zinc
I-Sec estimates 2,31,111 2,50,830 1,25,520 1,37,541
Consensus estimates 2,29,012 2,44,480 1,12,436 1,19,990
Variation (%) 0.9 2.6 11.6 14.6

Hindalco
I-Sec estimates 14,30,694 14,36,359 1,45,707 1,46,720
Consensus estimates 12,79,000 13,37,000 1,45,634 1,53,014
Variation (%) 11.9 7.4 0.1 -4.1

NMDC
I-Sec estimates 1,08,762 1,19,430 48,644 56,548
Consensus estimates 1,13,087 1,25,996 55,762 59,957
Variation (%) -3.8 -5.2 -12.8 -5.7
Source: Bloomberg, I-Sec research

Table 2: Ferrous pack – Volumes, realisations and margins

Q2FY20E Q2FY19 % chg YoY Q1FY20 % chg QoQ
Sales volume (mnte)
Tata Steel (standalone) 3.00 3.18 (5.7) 3.01 (0.2)
Tata Steel Europe 2.30 2.27 1.3 2.26 1.8
JSPL (standalone) 1.40 1.28 9.4 1.43 (2.1)
JSW Steel (standalone) 3.75 3.96 (5.3) 3.75 -
NMDC 5.81 6.71 (13.4) 8.73 (33.4)
Realisation (Rs/te)
Tata Steel standalone 48,720 55,282 (11.9) 52,586 (7.4)
Tata Steel Europe (US$/te) 897 1,001 (10.4) 922 (2.7)
JSPL (standalone) 42,213 49,454 (14.6) 47,560 (11.2)
JSW Steel (standalone) 41,733 48,215 (13.4) 45,733 (8.7)
NMDC 3,709 3,576 3.7 3,679 0.8
Margin (Rs/te)
Tata Steel standalone* 10,380 18,856 (45.0) 13,158 (21.1)
Tata Steel Europe (US$/te) 24 70 (65.7) 4 507.1
JSPL (standalone) 8,113 11,344 (28.5) 11,245 (27.9)
JSW Steel (standalone) 6,607 10,672 (38.1) 9,005 (26.6)
NMDC 1,873 1,878 (0.2) 2,138 (12.4)
Source: Company data, I-Sec research *Ex Bhushan

2
Metals ICICI Securities

Tata Steel (HOLD)

(QoQ chg: -32.1%; YoY chg: -42.8%)
Price chart Standalone
850 (Rs mn, year ending March 31)
750 Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
650 Gross Sales less Excise 1,49,161 1,79,020 (16.7) 1,60,913 (7.3)
550 Other Operating Income 3,000 3,223 (6.9) 2,786 7.7
(Rs)

450
Expenses
350
Total Expenditure 1,18,021 1,19,059 (0.9) 1,21,347 (2.7)
250
EBITDA 31,140 59,961 (48.1) 39,567 (21.3)
150
Margin (%) 20.9 33.5 24.6
Oct-16

Oct-17

Oct-18

Oct-19
Apr-17

Apr-18

Apr-19

Other Income 1,778 7,751 (77.1) 1,778 -

Interest 7,231 8,038 (10.0) 7,231 -
Depreciation 9,677 9,236 4.8 9,677 -
Operational PBT 16,011 50,438 (68.3) 24,437 (34.5)
Extraordinary Exp. - (282) (100.0) (408) (100.0)
Rep. PBT 16,011 50,156 (68.1) 24,030 (33.4)
Tax 5,662 17,477 (67.6) 8,642 (34.5)
PAT 10,349 32,679 (68.3) 15,388 (32.7)
Adj.PAT 10,349 32,961 (68.6) 15,796 (34.5)
Source: Company data, I-Sec research

Consolidated
(Rs mn, year ending March 31)
Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
Net Sales 3,45,723 4,35,441 (20.6) 3,59,471 (3.8)
Expenses 3,00,048 3,46,246 (13.3) 3,05,702 (1.8)
EBITDA 45,675 89,195 (48.8) 53,769 (15.1)
Margins (%) 13.2 20.5 15.0
Other Income 2,800 3,544 (21.0) 2,511 11.5
Interest 18,500 21,531 (14.1) 18,064 2.4
Depreciation 21,000 19,079 10.1 20,828 0.8
Operational PBT 8,975 52,130 17,387 (48.4)
Extra ordinary - 1,638 - 160
PBT 8,975 53,767 (83.3) 17,547 (48.9)
Tax 3,410 23,264 11,238
PAT 5,564 30,504 6,309
Adj. PAT 5,564 28,866 (80.7) 6,149 (9.5)
Minority Interest 100 4,825 100
Share of Associates 522 713 522
Adjusted PAT post MI/share of
associate 6,186 37,680 7,091
Reported PAT post MI/share of
associate 6,186 36,042 6,931
Source: Company data, I-Sec research

 Tata Steel’s standalone EBITDA is expected to decrease by 21% QoQ as

realisation/te seems set to decline by >Rs4,000/te.
 Tata Steel Europe’s volumes are expected to be stable QoQ at 2.3mnte.
 Tata steel Europe estimates exclude any provision for losses on account of
carbon credit.
 Bhushan Steel’s EBITDA is also expected to decline on declining realisation.

3
Metals ICICI Securities

JSW Steel (REDUCE)

(QoQ chg: -22.0%; YoY chg:-43.3%)
Price chart Standalone
450 (Rs mn, year ending March 31)
400
350 Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
300 Net Sales 1,59,990 1,96,690 (18.7) 1,74,990 (8.6)
250
Raw Material Consumed 88,480 1,01,920 (13.2) 99,820 (11.4)
(Rs.)

200
150 Stock Adjustment (2,000) 710 (7,590)
100 Employee Expenses 3,870 3,360 15.2 3,870 -
50
0 Power, Oil & Fuel 12,149 15,450 (21.4) 13,310 (8.7)
Other Expenses 29,226 27,230 7.3 28,320 3.2
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Oct-19

Total Expenditure 1,31,725 1,48,670 (11.4) 1,37,730 (4.4)

EBITDA 28,265 48,020 (41.1) 37,260 (24.1)
Margin % 17.7 24.4 21.3
Other Income 1,500 2,020 (25.7) 1,620 (7.4)
Miscellaneous Income (Exp) - - -
Interest 9,500 9,290 2.3 9,630 (1.3)
EBIT 20,265 40,750 29,250
Depreciation 8,600 8,580 0.2 8,060 6.7
Extra-ordinary Items - - -
PBT (reported) 11,665 32,170 21,190
PBT (recurring) 11,665 32,170 21,190
Tax (reported) 3,500 6,640 4,450
Tax (recurring) 3,500 9,651 6,357
Reported PAT 8,166 22,840 (64.2) 14,230 (42.6)
Adjusted PAT 8,166 22,519 (63.7) 14,833 (44.9)
Sales volume (mnte) 3.75 3.96 (5.3) 3.75 -
Raw Material cost (Rs/te) 23,595 25,917 (9.0) 24,595 (4.1)
Power cost (Rs/te) 3,139 3,696 (15.1) 3,139 -
Blended Cost (Rs/te) 35,127 37,543 (6.4) 36,728 (4.4)
EBITDA/te (US$) (Adjusted) 94 152 (38.3) 129 (27.4)
Source: Company data, I-Sec research

Consolidated
(Rs mn, year ending March 31)
Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
Net Sales 1,86,559 2,15,520 (13.4) 1,98,120 (5.8)
Total expenditure 1,57,670 1,66,460 (5.3) 1,60,960 (2.0)
EBITDA 28,889 49,060 (41.1) 37,160 (22.3)
Margin % 15.5 22.8 18.8
Other Income 450 560 (19.6) 1,410 (68.1)
Interest 10,420 9,630 8.2 10,420 -
PBDT 18,919 39,990 (52.7) 28,150 (32.8)
Depreciation 10,000 9,740 2.7 10,260 (2.5)
PBT (recurring) 8,919 30,250 (70.5) 17,890 (50.1)
PBT (reported) 8,919 30,250 (70.5) 17,890 (50.1)
Tax (recurring) 2,676 9,360 (71.4) 7,620 (64.9)
Tax (reported) 2,676 9,360 (71.4) 7,620 (64.9)
Reported PAT 6,243 20,890 (70.1) 10,270 (39.2)
Adj. Net Profit after MI and associate 6,383 20,870 (69.4) 10,080 (36.7)
Source: Company data, I-Sec research

 Volumes are expected to be stable QoQ at 3.75mnte in Q2FY19. Realisations are

estimated to decline 9% QoQ. This leads to 24% YoY fall in standalone EBITDA.

4
Metals ICICI Securities

Jindal Steel & Power (BUY)

(QoQ chg: -30.4%; YoY chg: -46.9%)
Price chart Standalone
350 Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
300 Net sales 62,167 68,851 (9.7) 71,183 (12.7)
250 Other operating income - 373 -
200
(Rs.)

Total sales 62,167 68,488 (9.2) 70,848 (12.3)

150
Change in stock - 939 NA (592) NA
100
Consumption of raw materials 30,370 29,600 2.6 30,282 0.3
50
Purchase of traded goods 2,000 2,299 (13.0) 2,761 (27.6)
0
Employee costs 1,617 1,607 0.6 1,617 -
Apr-17

Apr-18

Apr-19
Oct-16

Oct-17

Oct-18

Oct-19

Other expenditure 6,300 20,259 (68.9) 15,140 (58.4)

Total costs 50,809 53,967 (5.9) 54,768 (7.2)
EBITDA 11,358 14,521 (21.8) 16,080 (29.4)
Margin (%) 18.3 21.2 22.7
Depreciation 5,671 5,825 (2.7) 5,671 -
EBIT 5,687 8,695 10,409 (45.4)
Interest expense 7,000 6,758 3.6 6,970 0.4
Other income - - -
Extraordinary / Forex (gain)/Loss - (2,555) -
PBT (recurring) (1,313) 1,938 NA 3,440
PBT (reported) (1,313) 4,492 NA 3,440
Tax (recurring) (394) 666 NA 1,201
Tax (reported) (394) 666 NA 1,201
PAT (recurring) (919) 1,272 NA 2,239 (141.0)
PAT (reported) (919) 3,827 NA 2,239
Source: Company data, I-Sec research

Consolidated
% Chg
Q2FY20E Q2FY19 % Chg YoY Q1FY20 QoQ
Net sales 81,952 99,955 (18.0) 99,791 (17.9)
Other operating income - 604 (100.0) -
Total sales 81,952 99,823 (17.9) 99,456 (17.6)
Change in stock - 785 NA 3,185
Consumption of raw materials 37,502 39,994 (6.2) 37,186 0.9
Purchase of traded goods 1,000 2,796 (64.2) 456 119.5
Employee costs 2,800 2,686 4.3 2,808 (0.3)
Other expenditure 11,559 21,076 (45.2) 23,337 (50.5)
Total costs 65,718 77,749 (15.5) 77,725 (15.4)
EBITDA 16,234 22,074 (26.5) 21,731 (25.3)
Margin (%) 19.8 22.1 21.8
Depreciation 10,500 10,314 1.8 10,536 (0.3)
EBIT 5,734 11,760 11,195
Interest expense 10,500 10,858 (3.3) 11,090 (5.3)
Other income 60 9 8
Extraordinary / Forex (gain)/Loss - (2,555) -
PBT (recurring) (4,706) 911 NA 113 NA
PBT (reported) (4,706) 3,466 NA 113 NA
Tax (recurring) (800) 674 NA 987
Tax (reported) (800) 674 NA 987
PAT (recurring) (3,906) 237 NA (874) NA
PAT (reported) (3,906) 2,792 NA (874) NA
Minority interest - 645 -
Share of associates - - -
PAT after minority (recurring) (3,906) 882 NA (874)
PAT after minority (reported) (3,906) 3,437 NA (874)
Source: Company data, I-Sec research

 We forecast volumes to decrease 2% QoQ and EBITDA/te to be down 28% QoQ

at Rs8,113 leading to an estimated 29% QoQ decline in standalone EBITDA.
Jindal Power’s EBITDA is likely to increase QoQ, led by lower cost of generation.

 Oman spreads are likely to decline QoQ to US$21/te with volumes expected at
0.41mnte.

5
Metals ICICI Securities

Vedanta (HOLD)
(QoQ chg: -12.8%; YoY chg: -38.4%)
Price chart Consolidated
400 (Rs mn, year ending March 31)
350 Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
300
250
Net sales 2,05,367 2,27,050 (9.6) 2,13,740 (3.9)
(Rs.)

200 Total expenditure 1,59,795 1,75,720 (9.1) 1,61,760 (1.2)

150 EBITDA 45,572 51,330 (11.2) 51,980 (12.3)
100 Cairn India 17,319 20,260 (14.5) 18,250 (5.1)
50
Zinc India 19,889 22,390 (11.2) 24,290 (18.1)
0
Zinc International 956 160 497.8 1,280 (25.3)
Apr-17

Apr-18

Apr-19
Oct-16

Oct-17

Oct-18

Oct-19

Power business 2,705 3,770 (28.2) 3,920 (31.0)

Aluminium business 2,359 3,370 (30.0) 1,790 31.8
Copper (690) 120 (660)
Iron Ore 1,633 910 79.5 1,140 43.3
Others 1,400 1,680 (16.7) 1,970 (28.9)
Other income - (1,330) -
Interest 4,000 5,740 (30.3) 3,800 5.3
PBDT 14,010 14,780 (5.2) 13,410 4.5
Depreciation 35,562 42,290 (15.9) 42,370 (16.1)
Extraordinary expenses 22,580 19,310 16.9 21,550 4.8
PBT - (3,200) -
Tax 12,982 26,180 (50.4) 20,820 (37.6)
Reported profit after tax 3,895 7,180 (45.8) 1,380 182.2
Net Profit after Minority Interest 9,087 19,000 (52.2) 19,440 (53.3)
Adj net profit 4,881 13,430 (63.7) 13,510 (63.9)
Source: Company data, I-Sec research

 Most of the divisional EBITDA has been impacted on account of lower realisations
across the board. This leads to 12% QoQ decline in EBITDA, accentuated by
lower LME prices.
 Aluminium business is expected to witness a sequential decline in EBITDA,
primarily due to lower LME prices and no meaningful benefit of alumina price
reduction.

6
Metals ICICI Securities

Hindustan Zinc (BUY)

(QoQ chg: -12.4%; YoY chg: -21.4%)
Price chart (Rs mn, year ending March 31)
Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
390
Net Sales 46,826 47,770 (2.0) 49,870 (6.1)
340 Stock Adjustment - (1,050) (60) (100.0)
290 Employee Expenses 2,130 2,450 (13.1) 1,820 17.0
(Rs.)

240 Power costs 3,800 4,380 (13.2) 4,450 (14.6)

190 Mining Royalty expenses 6,990 6,280 11.3 5,940 17.7
140 Other expenses 1,378 1,237 11.4 1,295 6.4
90 Total expenditure 26,700 24,430 9.3 25,100 6.4
EBITDA 20,126 23,340 (13.8) 24,770 (18.7)
Apr-17

Apr-18

Apr-19
Oct-16

Oct-17

Oct-18

Oct-19

Other Income 5,390 3,940 36.8 4,290 25.6

PBIDT 25,516 27,280 (6.5) 29,060 (12.2)
Interest 400 - 290 37.9
PBDT 25,116 27,280 (7.9) 28,770 (12.7)
Depreciation 5,530 4,540 21.8 5,340 3.6
PBT 19,586 22,740 (13.9) 23,430 (16.4)
Tax 4,309 4,830 (10.8) 5,780 (25.4)
PAT 15,277 18,150 (15.8) 17,650 (13.4)
Production data (te)
Zinc 1,72,000 1,62,000 6.2 1,72,000 -
Lead 50,000 49,000 2.0 48,000 4.2
Silver 178 172 3.5 199 (10.6)
Source: Company data, I-Sec research

 Hindustan Zinc is expected to report 14% QoQ lower EBITDA for Q2FY20 mainly
due to lower zinc LME priceswhich has declined 15% QoQ to US$2,352/te.

7
Metals ICICI Securities

Hindalco (HOLD)
(QoQ chg: -8.4%; YoY chg: -24.4%)
Price chart Standalone
300 (Rs mn, year ending March 31)
250 % Chg % Chg
200 (Rs mn) Q2FY20E Q2FY19 YoY Q1FY20 QoQ
(Rs)

150 Net Sales 1,05,333 1,08,330 (2.8) 1,00,547 4.8

100
Raw Material Consumed 59,117 63,673 (7.2) 57,405 3.0
Stock Adjustment - (1,574) 2,068
50
Total raw material expenses 59,117 62,099 (4.8) 59,473 (0.6)
0
Employee Expenses 4,762 5,110 (6.8) 4,762 -
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Oct-19

Manufacturing Expenses (Power & Fuel) 18,309 17,058 7.3 17,453 4.9
Other Expenses 13,860 13,155 5.4 11,685 18.6
Total expenditure 96,048 97,423 (1.4) 93,372 2.9
EBITDA 9,285 10,907 (14.9) 7,174 29.4
-Copper estimated 3,602 3,352 7.5 3,150 14.3
-Aluminium estimated 5,683 10,111 (43.8) 6,147 (7.5)
-Elimination/others (0) (2,555) (2,123)
Margin (%) 8.8 10.1 7.1
Other Income 2,014 2,012 0.1 2,014 -
Interest 4,200 4,242 (1.0) 4,444 (5.5)
Depreciation 4,200 4,001 5.0 4,180 0.5
PBT 2,899 4,676 (38.0) 347
Tax expense 1,015 904 67
Exceptional items - - -
PAT reported 1,884 3,085 (38.9) 226 734.5
PAT adjusted 1,884 3,085 (38.9) 226 734.5
Source: Company data, I-Sec research

Standalone + Utkal
(Rs mn, year ending March 31)
Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
Revenue from operations 1,05,333 1,08,330 (2.8) 1,00,550 4.8
Aluminium 8,097 13,490 (40.0) 8,890 (8.9)
Copper 3,602 3,880 (7.2) 2,530 42.4
Total EBITDA 11,699 17,370 (32.6) 11,420 2.4
Other Income 830 1,860 (55.4) 830 -
Finance costs 4,930 4,790 2.9 4,930 -
PBDT 7,599 14,440 (47.4) 7,320 3.8
Depreciation 4,940 4,750 4.0 4,940 -
Profit before exceptional items and Tax 2,659 9,690 (72.6) 2,380 11.7
Profit after tax 1,994 7,250 (72.5) 1,670 19.4
Source: Company data, I-Sec research

8
Metals ICICI Securities
Novelis
(US$ mn, year ending March 31)
% Chg % Chg
(US$ mn) Q2FY20E Q2FY19 YoY Q1FY20 QoQ
Effective Net Sales 2,887 3,136 (7.9) 2,925 (1.3)
COGS 2,399 2,657 (9.7) 2,414 (0.6)
% of Net Sales 83.1 84.7 82.5
Selling General & Administrative 130 127 2.4 144 (9.7)
% of Net Sales 4.5 4.0 4.9
EBITDA 359 352 1.9 367 (2.3)
Margin (%) 12.4 11.2 12.5
EBITDA/te(Rolled shipments) 423 436 (2.9) 442 (4.2)
Depreciation & Amortisation 86 86 - 88 (2.3)
R&D Expenses 17 17 - 19 (10.5)
Interest Expenses 64 68 (5.9) 65 (1.5)
Others 4 1 4
Profit before tax and minority interest 188 180 4.3 190 (1.2)
Provision (benefit) for taxes on loss 60 64 63
Loss before minority interests’ share 128 116 127
Minority Interests Share - - -
Net Income (Loss) 128 116 10.1 127 0.5
Source: Company data, I-Sec research

Consolidated
(Rs mn, year ending March 31)
(Rs mn) Q2FY20E Q1FY20 % Chg QoQ
Net Sales 3,09,640 2,99,721 3.3
Raw Material Consumed 1,85,784 1,78,182 4.3
Stock Adjustment - (1,535)
Total raw material expenses 1,85,784 1,76,646 5.2
Employee Expenses 22,826 21,739 5.0
Manufacturing Expenses (Power & Fuel) 25,585 24,367 5.0
Other Expenses 44,694 42,244 5.8
Total expenditure 2,78,889 2,64,996 5.2
EBITDA 35,288 34,725 1.6
Margin (%) 11 12
Other Income 2,500 2,961 (15.6)
Interest 9,600 9,566 0.4
Depreciation 12,400 12,354 0.4
PBT 15,788 15,548 1.5
Tax expense 4,736 4,931 (3.9)
PAT reported 11,063 10,629 4.1
PAT adjusted 11,063 10,847
Source: Company data, I-Sec research

 We expect 15% QoQ increase in EBITDA (standalone) led by an increase in

copper EBITDA and a decrease in aluminium EBITDA. While LME prices
decreased QoQ for both aluminium and copper, volumes for copper are expected
to be higher QoQ.
 Novelis is expected to witness an EBITDA decline of 2% QoQ driven largely by
lower realisation.
 Consolidated EBITDA is likely to increase 1.6% QoQ.

9
Metals ICICI Securities

NMDC (BUY)
(QoQ chg: -17.2%; YoY chg: -16.3%)
Price chart (Rs mn, year ending March 31)
Q2FY20E Q2FY19 % Chg YoY Q1FY20 % Chg QoQ
180
Net sales 21,902 24,379 (10.2) 32,637 (32.9)
150 Consumption of stores & spares 300 518 (42.0) 506 (40.7)
Employees cost 2,300 2,696 (14.7) 2,531 (9.1)
(Rs)

120 Selling expenses incl freight 1,350 339 298.3 1,901 (29.0)
Royalty & cess 4,067 3,359 21.1 5,817 (30.1)
90
Other expenditure 3,000 3,931 (23.7) 3,255 (7.8)
60 Total costs (Reported) 11,017 11,785 (6.5) 13,969 (21.1)
EBITDA (reported) 10,885 12,594 (13.6) 18,668 (41.7)
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Oct-19

Margin (%) 49.7 51.7 57.2

Depreciation 650 675 (3.7) 648 0.4
EBIT 10,235 11,919 (14.1) 18,021 (43.2)
Other income 500 1,310 (61.8) 1,228 (59.3)
Finance Cost 102 97 6.1 117 (12.7)
Exceptional items - - - NA
PBT 10,632 13,132 (19.0) 19,132 (44.4)
Tax 3,509 6,767 (48.2) 7,337 (52.2)
PAT (Reported) 7,124 6,365 11.9 11,794 (39.6)
PAT (Adjusted) 7,124 6,365 11.9 11,794 (39.6)
Sales volume (mnte) 5.8 6.7 (13.4) 8.7 (33.4)
Realisation (Rs/te) 3,709 3,576 3.7 3,679 0.8
Realisation (US$/te) 53 49 7.2 57 (7.6)
EBITDA (Rs/te) 1,873 1,878 (0.2) 2,138 (12.4)
Source: Company data, I-Sec research

 Sales volumes reduced sharply to 5.8mnte in Q2FY20, ~33% lower QoQ.

Realisations are expected to be higher by 0.8% QoQ. We estimate EBITDA/te to
be lower by 12% QoQ given a negative operating leverage.

10
Metals ICICI Securities

Global metals/mining stock performances

% change
1 month 3 months 6 months YTD 1 year
China-Steel
Angang Steel (2.8) (22.6) (38.4) (25.5) (38.5)
Maanshan Iron & Steel (0.4) (25.5) (39.4) (26.0) (38.3)
Hunan Valin Steel Tube 0.3 (17.9) (35.2) (9.5) (35.8)
China Steel Corp 0.5 (7.3) (9.4) (6.9) (11.5)
Japan-Steel          
Nippon Steel Corp (1.4) (19.4) (23.5) (19.2) (30.9)
JFE Holdings 1.3 (18.3) (30.8) (24.4) (43.6)
Kobe 2.4 (18.0) (31.1) (22.1) (36.7)
Korea-Steel          
Posco 4.7 (13.5) (25.2) (16.9) (32.4)
Dongkuk Steel Mill 4.3 (6.7) (23.2) (18.1) (36.0)
Hyundai Steel 0.8 (12.2) (26.5) (24.5) (40.0)
India-Steel          
Tata Steel 4.6 (36.2) (40.0) (36.4) (37.9)
JSW Steel 7.6 (22.9) (27.0) (29.3) (38.7)
SAIL 5.4 (42.0) (48.8) (45.8) (50.9)
Jindal Steel 5.5 (36.3) (50.9) (43.4) (45.1)
Russia Steel          
Severstal (8.4) (19.7) (17.0) (1.1) (19.2)
Evraz (9.8) (38.1) (39.7) (14.2) (31.3)
Magnitogorsk (5.2) (22.3) (25.2) (15.1) (34.8)
Brazil- Steel
CSN (7.2) (31.3) (31.5) 38.5 27.6
Gerdau 1.3 (22.4) (27.3) (21.0) (28.9)
Usinas (2.2) (24.6) (28.9) (24.9) (21.1)
European Steel
Thyssenkrup 16.0 (5.1) (9.9) (22.0) (45.5)
Salzgitter (7.0) (41.3) (50.1) (46.0) (69.6)
Arcelormittal (7.2) (26.5) (42.9) (39.4) (60.9)
US Steel
AK Steel 3.9 (2.7) (24.0) (4.4) (56.5)
Nucor 1.6 (10.8) (18.6) (4.8) (24.6)
US Steel 2.4 (25.0) (45.4) (40.0) (63.4)
Steel Dynamics 5.3 (6.9) (20.8) (6.6) (39.2)
Aluminium
Alcoa 9.6 (15.0) (32.7) (27.4) (55.0)
Hindalco 4.5 (15.3) (18.9) (20.8) (24.6)
Norsk Hydro 5.4 (8.6) (23.5) (27.7) (39.7)
Vedanta ltd 9.8 (19.2) (25.8) (30.1) (36.4)
Aluminium Corp of China 6.1 (10.9) (28.1) (3.3) (34.5)
Century Aluminium 19.9 (5.3) (28.2) (13.7) (40.1)
Miners
BHP Billton (4.0) (20.8) (17.4) 2.6 (0.8)
Rio Tinto (1.5) (22.0) (17.6) 12.0 9.7
Fortescue 7.2 (14.5) 10.7 115.2 142.2
Vale 0.2 (19.2) (19.0) (17.6) (30.1)
Coal India 5.3 (28.4) (23.7) (24.0) (29.0)
Cliffs Resources 0.3 (38.3) (35.5) (11.6) (46.0)
Zinc
Hindustan Zinc 0.4 (15.8) (29.3) (26.4) (20.0)
Teck resources (10.3) (34.0) (34.0) (29.2) (38.9)
Freeport Mcmoran (2.2) (21.6) (32.6) (14.0) (36.4)
First Quantum 21.9 (20.3) (36.2) (7.5) (37.1)
Source: Performance in US$ terms, Bloomberg, I-Sec research

11
Metals ICICI Securities

Valuation methodology and key risks

Tata Steel (HOLD, target price: Rs323): We maintain our HOLD rating on Tata Steel
with a target price of Rs 323/share. Steel prices remain the key risk to our forecast.

JSW Steel (REDUCE, target price: Rs180): We maintain our REDUCE rating on the
stock with a target price of Rs180 based on FY21E EV/E of 6.5x (adjusted for
acceptances). The concave nature of margins/earnings to volumes and costs is a
matter of concern for a highly leveraged (operationally and financially) entity like JSW
Steel.

JSPL (BUY, target price: Rs215): We maintain our BUY rating on the stock. We
follow the SoTP methodology for JSPL based on FY21E numbers. Inability to source
coal over the longer run and gradual increase in leverage can make JSPL forego the
benefit of lower fixed costs. This remains the biggest risk to the company’s business
model. Also, an adverse outcome of the CBI enquiry against the promoter remains a
key downside risk. The upside risks are in the form of quick resolution of coal
availability issues and a favourable steel cycle.

Vedanta (HOLD, target price: Rs160): We maintain our HOLD rating on Vedanta
with a target price of Rs160 (FY21E SoTP valuation). Commodity prices (particularly
of zinc) are the key risk to our earnings and valuation estimates.

Hindustan Zinc (BUY, target price: Rs266): We maintain our BUY rating on
Hindustan Zinc with a target price of Rs266 based on FY21E EV/E of 6x. Any material
decline in commodity prices and lower than expected volumes remain the key
downside risks.

Hindalco (HOLD, target price: Rs182): We maintain our HOLD rating on Hindalco
with a target price of Rs182 based on FY21E SoTP valuation. Higher aluminium
prices remain the key risk.

NMDC (BUY, target price: Rs149): We maintain our BUY rating on NMDC with a
target price of Rs149/share. Lower-than-expected sales volumes and extensive
correction in iron ore prices are the key negative risks to our call.

12
 (BRL/USD) (US$/te) (US$/te)
(US$/te)

2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
4.3
300
350
400
450
500
550
600
650

4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
Metals

Jul-15

1,500
1,700
1,900
2,100
2,300
2,500
2,700
2,900
Jul-15 Jul-15
Nov-15 Jul-15
Nov-15 Nov-15
Nov-15

BRL/USD
Apr-16

LME Lead
Apr-16 Apr-16
Apr-16
Aug-16 Aug-16

LME Copper
Aug-16 Aug-16
Annexure

Jan-17 Jan-17
Jan-17 Jan-17

LME Lead
May-17 May-17
May-17

LME Copper
May-17
Oct-17
North Europe HRC

Oct-17
Oct-17 Oct-17
Feb-18 Feb-18
Feb-18 Jul-18 Feb-18
Jul-18
Jul-18

Lead LME inventories (RHS)

Dec-18 Dec-18 Jul-18

Source: Bloomberg, I-Sec research

Copper LME inventories (RHS)
Dec-18 Apr-19 Apr-19 Dec-18
Sep-19 Sep-19
North - West Europe Domestic HRC

Apr-19 Apr-19

0
0

50
50

100
150
200
250
100
150
200
250
300
350
400
450
Sep-19 Sep-19
(kte) (kte)

(USD/INR) (US$/te)
(GBP/Euro) (US$/te)

61.0
63.0
65.0
67.0
69.0
71.0
73.0
75.0
77.0

1.0
1.1
1.1
1.2
1.2
1.3
1.3
1.4
1.4
1.5
1.5
250
300
350
400
450
500
550
600
650
700

1,400
1,900
2,400
2,900
3,400
3,900
Jul-15 Jul-15
Jul-15 Jul-15
Nov-15 Nov-15 Nov-15

INR/USD
Nov-15
LME Zinc

GBP/ EUR
Apr-16 Apr-16 Apr-16
China HRC

Apr-16
Aug-16 Aug-16 Aug-16
Aug-16
Jan-17 Jan-17
Jan-17 Jan-17
LME Zinc

May-17
May-17 May-17
May-17
Oct-17
Oct-17 Oct-17
Feb-18 Oct-17
Feb-18 Feb-18
China domestic HRC

Jul-18 Feb-18
Jul-18
Zinc LME inventories (RHS)

Jul-18 Dec-18 Jul-18

Dec-18 Dec-18 Apr-19
Dec-18
Apr-19 Apr-19 Sep-19
Apr-19
0

Sep-19
100
200
300
400
500
600
700

Sep-19
(kte) Sep-19

(GBP/INR) (US$/te) (US$/te)

(RUB/US$)
35
45
55
65
75
85
95
105

1,400
1,600
1,800
2,000
2,200
2,400
2,600

80.0
85.0
90.0
95.0
100.0
105.0
110.0

48.0
53.0
58.0
63.0
68.0
73.0
78.0
83.0
Jul-15 Jul-15 Jul-15
Jul-15
Nov-15 Nov-15 Nov-15
INR/GBP

Nov-15

RUB/USD
Apr-16
Apr-16 Apr-16
Apr-16
Aug-16
Aug-16 Aug-16
Aug-16 Jan-17
Jan-17 Jan-17
LME Aluminium

Jan-17 May-17
LME Aluminium

May-17 Oct-17 May-17

May-17
China 62% iron ore

Oct-17 Feb-18 Oct-17

Oct-17
Feb-18 Jul-18 Feb-18
Mar-18
Dec-18
Jul-18 Jul-18 Jul-18
Aluminium LME inventories (RHS)

Apr-19
Dec-18 Dec-18 Dec-18
Sep-19
China 62% Fe

Apr-19 Apr-19 Apr-19

ICICI Securities

500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500

Sep-19 Sep-19 Sep-19

13
(kte)
Metals ICICI Securities

ICICI Securities has received an investment banking mandate for disinvestment in NMDC Ltd. This update is prepared on the basis of publicly available information.

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned
otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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14