Research Speak - 23-04-2010
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Transcript of Research Speak - 23-04-2010
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Market Commentary
In the last weeks market forecast for the week ended 23rd
April 2010, we said that the downside for the market forthe week under review would be limited and we said that the broader market would remain mostly range bound,however we said that sectors like Construction & Infrastructure, Banks, Power Equipments, etc., would show goodprice appreciation going forward. In line with our expectation the week did turn out to be a mixed bag with theBSE-Sensex ending higher by 0.6%.The Bse Sensex ended higher despite its Asian peers recording a loss for theweek.
The main catalyst for the market came from the RBIs monetary policy,(please refer to our report on Q4FY10Monetary Policy for details) where the rate hikes were more calibrated and muted compared to the marketexpectation and it ended up boosting infra related stocks in the bourses on the back of the announcement thathenceforth Bonds issued by Infrastructure companies having a residual maturity of 7 yrs could be put in Held TillMaturity category. Moreover, toll collection rights could be treated as a tangible security at the time of lending tocompanies engaged in doing BOOT,BOT and Annuity based projects. Provisioning on sub standard relating toinfrastructure companies was also reduced from 20% to 15%. This improve the availability as well as cost fundsfor the infra companies
Following this announcement infra companies, banks and rate sens itive sectors such as auto saw good priceappreciation. The BSE-Bankex and BSE-Auto recording weekly gains of 5% and 2% respectively.
As we mentioned earlier also, in the near term the market is going to be guided by the earnings posted by thecompanies as we are in the result season. So far the numbers have been on the positive side with most of thecompanies beating street as well as our expectations, (excepting Reliance Industries) and we expect that thisquarter we are going to see many more positive surprises from companies. In the medium term however, the courseof the market is going to be determined by the monsoon. If that is on the positive side in every possibility we mightsee Sensex surpassing its previous highs by the end of CY2010.
As last week we remain positive on Construction & Infrastructure, Cooling Solutions, Power Equipments, Pharmaand Banks.
Economy and Banking
This week the RBI came out with its Annual Monetary Policy Review. Except the Bank Rate, all the policy rates
were increased by 25 bps. We have discussed the details of the said policy action in our report titled RBI Annual
Policy Review dated 21st
April, 2010. In our report and other communications also we have been saying that
Banking seems to be an industry that continues to be relatively undervalued. We see banks having a sustainable
business model with ROEs of not less than 18-19%. With the economy reviving, the NPA scare has become
significantly muted. Still we see a number of well managed banks with diversified portfolio trading at less than 2
times adjusted book. This is somewhat strange as many companies in other industries who earn lesser ROE
Research Speak Week Ended 23rd April, 2010
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consistently and always trade at a valuation of much higher than 2. We make a comparative analysis of the banks
with other industries through following points:-
1) Value of the Book Value - The book value of manufacturing firms represents assets which might not have
a realizable or economic value close to their book value. However in case of banks, the book value is
represented by advances which do not fluctuate in value so much.
2) Provisioning Vs Depreciation - With changing business environment, the productivity and efficiency of
those assets (like plant and machinery) might get severely impacted. However, hardly any manufacturing
company makes adequate provisioning for the same. The banks on the other hand are bound to make
provisions on all kind of assets, whether it be sub-standard or standard. Hence the realizable value and
accounting value of the assets will not find a great mismatch like manufacturing companies. Hence, thebook value is a better and more realistic measure of realizable value of assets available to shareholders for
banks than compared to other industries
3) Volatility of ROE - The growth for India would be a savings and capital driven growth, followed by
consumption. The financial inclusion and the depth of the financial system is still far away from optimum.
Hence the importance and sustainability of banking system in India cannot be overemphasized. They are
the biggest provider of funds as bond markets are not big enough and equity is not feasible for all sizes of
businesses. Therefore we cannot see any scenario where banking is an industry can be sidelines. However,
in case of manufacturing industries, there are so many companies catering to different segments of society
having their own demand supply scenarios and business cycles. Hence, a certain industry might not be in a
position to continue to be value accretive for very long. For example, cement industry would find over
capacity eating into their margins and eroding capital in next few quarters. There are many industries
which become obsolete with time (like asbestos sheet industry). Hence, return on equity might see huge
volatility. But, the same is not the risk with banks. Whatever the industry (infrastructure, steel,
construction etc) or technology or the driver of growth (consumption, investments) is, funds would be
needed and banks would be in business. Hence, ROEs for the industry as a whole are bound to see lesser
volatility, compared to any other industry.
4) Entry Barriers In manufacturing companies like engineering, or infrastructure or auto, there is hardly
any business model which restricts foreign players to enter the field. We have seen Honda, Hyundai and
Chevrolet grabbing the market share from Maruti and TATA Motors. Engineering and construction
companies across the globe are flowing into India with superior technologies and are easily competing
with Indian firms. However, one thing that is very difficult to mimic or replicate is the reach and channelthe Indian banks have created over the years. Hence foreign banks coming and eating into the basic
savings and lending business is very difficult. We have seen a lot of competition coming in specialized
business like Investment Banking, Broking etc. But the basic savings and lending business depends on
reach and scale, which is very difficult to replicate. Hence, what we feel, the business and return
sustainability is far greater in banking industry compared to other industry on an average.
Looking at above points, we are convinced that the banking industry is comparatively undervalued. However we
do not paint all the banks with the same brush. Following table shows few details that are most relevant for banks,
and valuation of banks is a function of these factors:-
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P/BV This forms the benchmark for all our inter and intra industrycomparisons. It is most relevant in banking industry.
NNPA (%) The proportion of advances that are substandard and are not yetprovided for.
Total CRAR (%) Total Capital Adequacy Ratio. Shows the limit to which the bank canincrease its risk weight assets or it advances and investment bookwithout any further increase in capital. 9% is the regulatoryrequirement, however, banks normally keep 200-300 bps of cushion
Leverage Capacity Ratio
(Tier I/ Tier II) (LCR)
This is an indicator we use to estimate to what extent the bank canleverage its equity to increase its asset base, i.e without dilution
Return on Assets (ROA) The productivity, efficiency and profitability of the bank getsreflected here and is not impacted by the leverage the bank takes on
Return on Equity (ROE) This gives the impact of leverage on the return derived from assetsand shows what actually matters, returns to equity shareholders
Bank NameLatestP/BV
NNPA(%)
Total
CRAR(%)
CRAR -
Tier I(%)
CRAR -
Tier II(%)
LeverageCapacity
Ratio (Tier I/Tier II)
RONW(%)
Returnon
Assets(%)
Indian Bank 1.44 0.18 13.98 11.88 2.1 5.66 24.09 1.62
Bank of India 1.66 0.44 13.01 8.91 4.1 2.17 29.18 1.49
Federal Bank 1.15 0.3 20.22 18.42 1.8 10.23 12.15 1.48
Axis Bank 3.11 0.4 13.69 9.26 4.43 2.09 19.13 1.44
Punjab Natl.Bank 2.3 0.17 14.03 8.98 5.05 1.78 25.84 1.39
HDFC Bank 4.74 0.63 15.75 10.62 5.13 2.07 16.91 1.28
Corporation Bank 1.45 0.29 13.61 8.9 4.71 1.89 19.57 1.24
Andhra Bank 1.57 0.18 13.22 8.67 4.55 1.91 18.94 1.09
Bank of Baroda 1.78 0.31 14.05 8.49 5.56 1.53 18.65 1.09
J & K Bank 1.29 1.38 14.48 13.8 0.68 20.29 16.62 1.09
Canara Bank 1.62 1.09 14.1 8.01 6.09 1.32 22.61 1.06
St Bk of India 1.95 1.76 14.25 9.38 4.87 1.93 17.05 1.04
Kotak Mah. Bank 2.49 2.39 20.01 16.13 3.88 4.16 7.36 1.03ICICI Bank 2.25 2.09 15.53 11.84 3.69 3.21 7.83 0.98
Allahabad Bank 1.21 0.72 13.11 8.01 5.1 1.57 16.49 0.9
Syndicate Bank 1.01 0.77 12.68 7.85 4.83 1.63 21.58 0.81
Bank of Maha 1.14 0.79 12.05 6.11 5.94 1.03 19.59 0.72
ING Vysya Bank 1.78 1.23 11.65 7 4.65 1.51 12.5 0.7
IDBI Bank 1.16 0.92 11.57 6.81 4.76 1.43 12.05 0.62
Central Bank 1.73 1.24 13.12 6.97 6.15 1.13 15.27 0.45
Average 1.84 0.86 14.21 9.80 4.40 3.43 17.67 1.08
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Following are the top picks from the pack in order of strength from strongest to weakest:-
Indian Bank Enjoys the highest ROA in the sector of 1.62%. The LCR is also very high at 5.66. The total
CRAR is at 13.98% with Tier-I at ~12%. There significant headroom in Tier II capital as it is at 2.1%. Given the
spare capital (high CAR) and scope of leverage, low Tier- II and high LCR, there is tremendous scope for
increasing ROE. We can easily the ROE scale a level of 27-28%. The P/BV ratio is very cheap at 1.44 times. With
NPA at 0.18%, the risk to erosion of book value due to loan losses is minimal
Federal Bank There are many positives to the bank. The bank has significant spare capital with CAR at 20.22%.
With and ROA of 1.48%, the ROE can improve significantly from here. Given the pick up in demand for funds,
the capital utilization would result in significantly improved ROEs and hence a re-rating of the stock. Better returns
would further augment the book value. Net NPA at 0.3% is also among the lowest in the industry. The P/B does
not capture the capability of the bank to increase its ROE and hence becomes a must buy.
Bank of India It is a pure value play. High ROE of 29%, with second highest ROA of 1.49%, yet a P/B ratio of
1.66 times only. The NPA at 0.44% also do not pose a significant risk to the book.
ICICI Bank The bank is one of the best play on the Indian financial sector. It has exposures to every area of
financial services including Asset Management, Insurance, Private Equity, Project Finance, Broking and
Investment Banking besides normal banking activity. It is the largest private bank and the synergies it enjoys are
huge. The past two years have been years of consolidation for the bank, and it appears to emerge stronger after
trouble it has faced recently. The valuations are still not very expensive. We can see some equity dilution,
however, given the diverse business that the bank has, it is one of the best play on the banking and financial
services sector.
Bank of Baroda This has been one of our favorite banks, in terms of the operation, reach, competitiveness and
efficiency the bank has exhibited being a PSU. Gong by the numbers, CAR is still high at 14%. ROA is not bad at
1.09%. LCR is low, hence leverage benefit is not there, yet the operational parameters of the bank are good enough
to warrant it as a portfolio stock.
Jammu and Kashmir Bank Finally, one of the biggest turn around stories in banking industry. ROA at the
same level as BoB, i,e 1.09%. CAR is significantly high at 14.48%, with LCR 20. The bank virtually has no Tier-
II capital. Hence there is significant scope for increase in assets due to better capital utilization and leverage. The
valuation is cheap at 1.29 times P/B. The NNPA level is slightly higher at 1.38%. The valuation already capturesthe asset quality, but underestimates the ROE expansion from 16.62% levels we see at present.
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Sector and Stock Updates
Hindustan Zinc Ltd (HZL)
Hindustan Zinc is a part of the Sterlite Group. After the recent capacity expansion, the company has zinc smeltingcapacity of 9, 64,000 tons per annum (tpa) and lead smelting capacity of 85,000 tpa.Hindustan Zinc is the second-largest integrated zinc and lead producer in the world and is the only integrated zinc manufacturer in India. Due itits large scale of operations, Hindustan Zinc is also among the low-cost zinc and lead producers. While domesticsales contribute 65 per cent of the company's revenues, exports, mainly to China, account for the rest.
Business dynamics
Zinc and lead contribute over 95 per cent of the company's revenues. Zinc is anti-corrosive and hence findsapplication in construction activities, infrastructure facilities, household appliances, automobiles, steel furniture,and so on. Galvanisation (a metallurgical process where zinc is coated on steel or iron to prevent corrosion)accounts for 50 per cent of its usage. Over 80 per cent of India's demand for zinc is met by Hindustan Zinc.
Lead is the primary ingredient for automobile and industrial batteries. Over 88 per cent of the demand for leadcomes from the batteries industry.
Since most battery-makers have their lead-extraction facilities, Hindustan Zinc's share in the domestic market isabout 18 per cent. In addition to its principal products, the company also recovers silver, cadmium and sulphuricacid as by-products.
Demand outlook
Global steel consumption for 2010 is expected to increase by 12 per cent. In line with this, the International Leadand Zinc Study Group (ILZSG) also forecasts 12 per cent increase in zinc demand. The demand forecast for lead isequally positive, and ILZSG has predicted an 8 per cent demand growth in 2010.
With a revival in infrastructure, construction and automobile sales, demand for both the metals may remain strong.Though Hindustan Zinc did not take much of production cuts during the commodity meltdown, many global zincand lead miners suspended their operations during this period.
Therefore, unlike in the case of aluminum, which faced the problem of stock overhangs for a long time, zinc and
lead saw a relatively quicker correction in their warehouse stocks in the London Metal Exchange (LME).
Decline in warehouse stocks at LME, coupled with the positive demand outlook, have helped the LME prices ofzinc and lead move up by 35 per cent and 13 per cent respectively since October,2009.
Result update
Recently HZL has announced its Q4FY10 and FY10 annual results. On quarterly basis, company posted aboutRs24.98bn of topline and PAT at Rs12.39bn.Led by better zinc realizations (up 1.3% QoQ) and higher zinc-ledconcentrate (96kt v/s 41kt in Q3), the net sales grew by 13% QoQ. EBITDA grew by 11% QoQ to Rs15bn,primarily on account of higher concentrate sales and better realizations in acid business. PAT increased by 8%
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QoQ, lower as compared to growth in EBITDA, due to higher depreciation and interest cost associated withcommissioning of zinc smelter.
The 210 Ktpa hydro zinc smelter at Dariba and the 1 mtpa zinc concentrator at Rampura Agucha werecommissioned towards the end of the quarter, around three months ahead of schedule. Post commissioning, thetotal smelting capacity has increased to 964 ktpa. The 100 ktpa lead smelter, along with 160 MW CPP at Dariba, ison schedule and would be commissioned during Q2FY11.
Recommendation
Zinc prices have recovered much faster compared to other base metal prices after the 2008 financial meltdown.
Due to such strong and early recovery, many previously shut zinc mines are on the verge of opening up. Hencefrom this level, zinc and lead prices may not see substantial price rise. Even volume growth of HZL for FY11E isexpected to be about 30% over FY10 and then another 10-11% for FY12E.
At current market price, stock is no longer cheap. It is trading at about 13times PE based on trailing twelve monthsearnings . On EV/EBITDA and EV/Sales parameters also, stock is on the higher side of historic valuation zone.
Hence we recommend Hold to the stock.
Reliance Industries Ltd
The company has achieved a new milestone by clocking a annual sales figure of Rs200,000Cr. While its toplinewas more or less on expected lines, there has been slight disappointment on gross refining margin(GRM) side.
Compared to US$9.9/barrel GRM in Q4FY09, it posted a GRM of US$7.5/barrel in Q4FY10. Of course, it ishigher than the US$5.9/barrel GRM in Q3FY10. The company posted GRM of US$6.6/barrel for FY10.Because ofUS$4.5-5/barrel premium over benchmark Singapore GRM, it was widely expected that Q4FY10 GRM would bein the range of US$8.5-9/barrel.
We believe that the dip in gross refining margin compared to expectations can be attributed to shrinking ofdifference between cheaper sour varieties of crude with premium sweet type. RIL benefits from wider differentialbetween these two types of crude due to its high Nelson Complexity index. But recently most of the new refineriesthat have begun operations enjoy high Nelson Complexity Index. Hence we believe that going forward, probablyRIL would enjoy US$3-3.5/barrel kind of premium over Singapore refining margin.
There has been slight disappointment on petchem margin also. Compared to 13.9% petchem margin in Q3FY10, it
posted petchem margin of 14.4% in Q4FY10. The petchem margin has shown some erratic trend since January,2010.While polyethylene and poly propylene are firm, the company has taken a hit from weak margin in naphtha.With commissioning of KG basin gas and somewhat subdued spot RLNG prices, naphtha cracks have not been sostrong in recent months. Going forward also, we do not foresee petchem margin to improve significantly.
Coming to oil and gas segment, margin has been 39.4% in Q4FY10, compared to about 41% in Q3FY10.It waswidely expected that with ramping up of gas production from KG basin, the margin in this segment would at leastnot fall on sequential basis. However we believe that going forward, company has potential to scale up its marginin oil and gas segment. This is because compared to its potentialto produce 80mmscmd KG basin gas, company isonly producing 60 mmscmd of gas due to lack of progress from Government side on allocation of additional gas tonew customers.
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The government is likely to nominate new consumers for additional KG basin gas very soon. Already Gujarat Gashas received such a notification in the month of March.
On the exports front of auto fuel, it has not been very remunerative for RIL in Europe and USA in recent times dueto sluggish growth in demand. Moreover, USA is making significant progress in shale gas and this may lead toreduced demand for petrol and diesel in future. Hence going forward, probably RIL would have to look moretowards domestic consumption.
Despite all the above concerns, we feel that at present level there is very limited downside to the stock expect foradverse court judgment that is likely to be delivered on10th May,2010.
In recent times, company has formed a JV with a USA based energy company to explore huge opportunities inshale gas. This would help the company in next few years to tap into USA market significantly.
At the end, though stock may open weak on Monday, we feel it would provide a good buying opportunity.
Persistent Systems
Persistent systems has come out with its Q4FY10 and FY10 numbers recently. For the year FY10, it posted netsales of Rs601.15Cr.EBITDA for the year is Rs124Cr and PAT is Rs115.02Cr.Its EBITDA margins for the wholeyear stood at about 20% and PAT margin at about 19%.
Persistent Systems (India), promoted by technocrat, Dr Anand Deshpande, is one of the leading players in
outsourced software product development services. The company designs, develops and maintains softwaresystems and solutions, creates new applications and enhance the functionality of its customers' existing software
products. Currently, the company is present in the telecom & wireless, life sciences & healthcare and infrastructure
& systems space. It has been working on new technologies like cloud computing, analytics, enterprise mobility and
enterprise collaboration. Along with services, the company has been acquiring intellectual property (IP) from its
customers, sharing revenue with the clients. Currently, this stream contributes to about 7% of the revenue. As of
December 31, 2009, the company had added 251 new customers (net) since April 1, 2007, excluding one-time
customers for license sales with a number of active clients at 270 clients. Top client contributed 9.98% and top 10
clients contributed 41.27% of the revenue for the nine months ended December 2009. The repeat business for the
company is in and around the 90% levels.
As far as industry verticals are concerned, a major portion of the revenue accrues from independent softwarevendors (ISVs), which contributed 47% of the revenue, telecom contributed 24%, and practices, enterprise &
solutions contributed 29% for the nine months ended December 2009.
We are bullish on the stock because of its valuations and still the company is trading at PE of just 13 times basedon trailing twelve month numbers. The niche kind of business that the company is engaged is quite different fromthose of service companies like Infosys or TCS. Though margins enjoyed by pure software service providers havebeen historically high, things are increasingly become difficult to pure service providers because of stiffcompetition. In contrast, out sourced product solutions may be the new order of the day. Entry barrier is muchhigher in outsourced product development category.
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In coming days, companies like Persistent Systems are likely to be in focus and valuation gap is likely to narrow.Hence at CMP, we recommend Hold for investors who got allotment during IPO and BUY for new investors.
Sugar- The story of total Miscalculation
2008-09 was a year of the Centre and the industry both overestimating the country's sugar output, the 2009-10season is turning out to be just the other way round.
2008-09 season
At the start of the 2008-09 sugar season (October-September), the Centre reckoned production at 220 lakh tonnes(lt), assuming Uttar Pradesh (UP) to contribute 70 lt and Maharashtra 61 lt. As the season progressed, these werepared, first to 205 lt, 62 lt and 57 lt and then to 188 lt, 59 lt and 51 lt, respectively. Even right up to August, theCentre maintained production to be in the 150-155 lt range. However, when the season ended, the final all-Indianumber came to 145.38 lt, while being 40.64 lt for UP and 45.78 lt for Maharashtra. In this episode how theindustry is politicized came to the fore as , the Union Food and Agriculture Minister, Mr. Sharad Pawar, laid theblame for this divergence of nearly 75 lt between initial and final estimates on the industry and even threatening topenalize factories for late and incorrect reporting of their production figures to the Sugar Directorate.
2009-10 season
This time though, it is quite the opposite. On November 6, the Food Ministry convened a meeting of State CaneCommissioners and based on their inputs, production for the 2009-10 season was pegged at 146.14 lt. Thisincluded 47 lt from Maharashtra and 39.60 lt from UP. While the Centre stuck to this internal estimate (whilepublicly proclaiming a 160 lt figure), the industry put it a tad lower at 140-145 lt. By January, the consensus withinthe trade was a production of below 140 lt, with some even venturing a sub-130 lt number. All that was enough forsugar prices to hit the stratosphere, as ex-factory realizations surged by about Rs 10/kg between Christmas andmid-January. But since then, prices are back to actually lower than where they were and, worse, seeminglyheaded further down. The trigger, again, is production, which is now seen to top 170 lt (according to Mr Pawar),with the National Federation of Cooperative Sugar Factories expecting it even higher at 180-185 lt. The way outputestimates have been revised upwards and may well be revised further is better captured by looking at justMaharashtra and UP.
Maharashtra mills were originally anticipated to crush just 410 lt cane, which, on an average 11.5 per centrecovery, would have yielded slightly over 47 lt of sugar. But as on March 31, crushing for the ongoing season hadtouched 531.11 lt, with corresponding sugar production of 60.81 lt. The latest projection of total crushing andproduction for the season are 560 lt and 65 lt, respectively.
Likewise with UP which looks set to produce 50-52 lt, against the initial sub-40 lt estimate. In both States, itappears mills simply did not account for the possibility of higher cane yields due to farmers taking extra interest intheir crop this time. The mills failed to gauge the farmer's enthusiasm for applying more fertilizers and other inputsin view of remunerative cane prices, just as the last time underestimated anger and indifference on not being paidadequately in time.
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Commodities Outlook
Steel
Flat Products
The flat product segment continued to be strong, despite poor demand. Demand did pick up in certain segments,but that was only due to restocking activities. There is huge amount of speculation in the market and this trend islikely to continue until the iron ore contracts are settled.
The plate sector is improving. It is one of the few areas where the global recovery can be felt. Yellow goods sales
have increased in the last few months, due to the US and China driven recovery in the energy and mining sectors.There was firmness in the Indian market as Essar Steel hiked its prices. Essar Steel hypermart has increased thegalvanized sheet price for the second time in April by Rs 750 per ton. Meanwhile, steel users, especially those inthe micro, small and medium enterprises (MSME) sector, are struggling under the weight of soaring steel prices.Some even complained that the steel majors are operating like a cartel and are constantly raising their prices. TheIndian Ministry of Steel has convened a meeting of leading integrated steelmakers to discuss the recent spate ofprice increases.
The Chinese prices continued its uptrend even this week as the market is expecting the major Chinese mills willraise their May ex-works prices. There was an air of confidence in the market mainly in the traders front. Traderswere not in a hurry to sell as the expected price hike from most major mills will drive up the spot prices. Of theexpected hikes, some were seen this week. First to come was Wuhan Iron & Steel (Wugang) which significantlyraised its May ex-works prices of hot rolled coil, plate and hot-dipped galvanized coil by RMB 500 per ton ($73per ton), while it has also increased its cold rolled coil by RMB 100 per ton ($15 per ton). As a result, WugangsQ235 5.5mm hot rolled coils ex-works price is RMB 4,700 per ton ($689 per ton), and its SPCC 1.0mm cold rolledcoils is RMB 6,050 per ton ($886 per ton) exclusive of 17% VAT.
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Long products
The long products market was firm as the raw materials upsurge continued. The demand was generally slow.However, owing to some restocking in certain market pockets, there was some demand for certain materials.However, this will be soon over. Not much of import activities were seen as the imports continued to beuncompetitive. There is high level of speculation in the market. This is resulting in scepticism in the end usersegments who are buying for their immediate requirements. Moreover, the construction segment in most of thegeographies is still in the doldrums.
The Indian market witnessed some firmness as one of the steel majors announced a hike in its long product pricesfor April bookings spurred by the constantly increasing prices of raw materials such as coking coal and iron ore.
The industry is unanimously justifying the recent spate of price hikes as imperative in the face of soaring rawmaterials costs and the transition from an annual to a quarterly pricing mechanism for iron ore. These increaseshave helped the steel companies recover some of the losses they faced earlier, but the small retail segment wasslow on sales. The Indian market is at present looking forward to local government spending, which is still lagging.
Meanwhile, some of the prime steel companies have stopped accepting bookings for rebars, which may be becauseof low stocks and that this may signal a further price hike by the company later this month. The market is veryvolatile because of the transition from annual to quarterly pricing schemes. In the interim, the smaller players arefinding it difficult to survive the current condition as the buyers are preferring to defer their purchases, owing to
the surge in prices. With hardly any new orders for June, these players have had to curtail production by about25%. Their players complained that the prime steel producers of the country are operating like a cartel. Thus, theIndian Ministry of Steel has convened a meeting of leading integrated steelmakers to discuss the recent spate ofprice increases.
As per Tata Steels predictions, prices will continue to surge. However, increased supply from prime producers in2010-11 would put pressure on secondary producers. Thus, the secondary producers would keep prices undercheck which is already seen in the market. The Chinese long products market saw some strength this week.Chinese bar and rod producers have kept raising their ex-works prices, and this has helped to further strengthenspot market prices.
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Iron Ore
The days are getting tougher for the Chinese iron ore buyers, even as prices hit the roof. All attempts made by theChinese appear to be meeting the same fate, with prices moving up further. The last one week was no differentfrom the ones which the global iron ore market has been witnessing for over a month now. Seeing that the threemining giants namely BHP Billiton, Vale and Rio Tinto have stuck to their point of conducting business based onquarterly contracts, the China Chamber of Commerce of Minerals & Chemicals Importers & Exporters (CCCMC)had issued a ban on the import of iron ore characterized by Fe content less than 60%. As per the ban though tradersare not allowed to directly import the low grade ore, steel mills can directly buy the low grade ore or source itthrough certified suppliers. This did not help much and prices kept rising.
In the week gone by, trading volumes were seen thinning out since traders awaited greater clarity on the imposedban. Indian miners struggled to make fresh bookings with Chinese buyers. Most of the transactions which tookplace last week were directly carried out between the steel mills and Indian exporters. There are reports whichsuggest that Indian sellers of low grade ore, especially those based out of Goa, are now looking at beneficiating theore and making it just about eligible to be sold to traders in China. Another week went by with no positive movebeing made towards signing price contracts by Chinese buyers. Instead the China Ministry of Commerce is now
planning to initiate a probe against the three global mining companies for violating Chinas anti-monopoly law.Through this law, China has the power to conduct anti-monopoly investigations against foreign companies if theynegatively impact the competitiveness of Chinese companies. However, Chinese traders feel that the investigationis unlikely to fetch results, and would only result in prices moving up. This is because there is hardly any concreteevidence and the three mining companies may be working as per a tacit arrangement.
Though initially some of the leading Chinese steel mills were forthcoming to the idea of a quarterly contract, theyare now resisting a shift from the traditional annual benchmark pricing mechanism. Iron ore prices in Asia arerecorded as being the highest since August 2008. As far as India is concerned, the ban on import of low grade orehas resulted in shipments taking a backseat. This is because the high grade ore producing region, which is Orissa,has shut down several of its mines based on legality issues and the supply of the high grade ore has in any casebeen low. The ban on low grade ore only compounded the problem. The timing of the ban has been particularly
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bad for Goan miners since the shipments are carried out at a zealous pace just before the monsoons hit the coastalregion, which is now. Heavy rains render the ports non-functional during monsoons which start around the end ofMay and stretch up to September.
As per Mysteel data by the end of last week the iron ore stock at Chinas major ports was recorded at 67.31 milliontons, which marks a rise of 6,70,000 tons. Out of this total volume Australian ore comprised 31%, Indian iron ore24% and Brazilian ore comprised 25%. During the beginning of the month, it was reported that the China Iron &Steel Association (CISA) had communicated to the steel mills and traders to make use of the stockpiles andboycott ore coming from the three mining companies. Indian iron ore fines characterized by 63.5% Fe content hasmoved up once again in the Chinese spot market. Prices for the particular grade currently range between $177 and$184 per ton cfr as against the previous weeks prices which were in the range of $170 and $173 per ton cfr.
Stock Recommendation at current market price
Stock Name Recommendation
SAIL Hold
JSW Steel Hold
JSPL Hold
Bhushan Steel Hold
Sesa Goa Hold
NMDC Hold
Gujarat NRE Coke Hold
Welspun Guj. Hold
Jindal Saw Reduce
Ratnamani Metals Hold
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8/9/2019 Research Speak - 23-04-2010
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Analyst Team
Analyst Name Sectors E-mail Contact Number
Samudrajit Gohain Oil & Gas, Engineering [email protected] +91- 9748860335
Kinshuk Acharya Steel, Agriculture [email protected] +91- 9681478735
Md. Riazuddin, FRM Banking, Economy, Power [email protected] +91- 9903062346
Rajiv Agarwal Auto, Tea, Sugar [email protected] +91- 9903076345
Ankit Kanodia Infrastructure [email protected] +91- 9163278562
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