Vedanta, Tata Steel, SAIL, Hindalco and JSPL: Kotak shares Q2 estimates, stock price targets

Kotak Institutional Equities expects domestic steel makers to see expansion in margins in the September quarter due to lower coal prices amid inventory lag, which would be partly offset by weaker prices. A strong demand should lead to an 8 per cent on year-on-year (YoY) volume growth for the quarter gone by, the domestic brokerage said. Kotak, however, sees a mixed quarter for base metal producers. It finds better risk-reward in ferrous over non-ferrous producers.

Kotak has suggested Jindal Steel Ltd (JSPL) as its top 'BUY' in the sector. It has Buy rating on NMDC and Tata Steel and 'Sell' rating on Vedanta, SAIL, Hindustan Zinc and Nalco.

"We find better risk-reward in ferrous stocks (steel and iron ore) over base metals (aluminium and zinc producers) due to better growth outlook and margin visibility. Steel companies should see strong volume growth due to capacity expansion and strong domestic demand, whereas steel margins remain at mid-cycle levels when Chinese margins are close to breakeven. Aluminium producers lack volume growth and we see a downside risk to aluminium prices due to surplus market and strong spreads," Kotak said.

For Tata Steel, Kotak expects Europe operations to report an Ebitda loss of $142 per tonne against a loss of $96 per tonne in Q1, led by price weakness and higher fixed costs. For NMDC, it sees Ebitda per tonne to decrease 23 per cent sequentially to Rs 1,394 per tonne, mainly due to operating deleverage and lower realisations sequentially. Ebitda per tonne for NMDC, though, may rise 42 per cent YoY, it said.

Kotak said aluminium companies should see sequentially lower prices, more than offset by coal costs, whereas the sharp decline in zinc prices should lead to lower margins for zinc producers. Sequentially, prices o zinc, aluminium and alumina fell 4.3 per cent, 4.5 per cent and 1.9 per cent respectively, in dollar terms.

Kotak said Hindalco's India Ebitda (standalone + Utkal) should be around Rs 2,400 crore (up 15 per cent YoY, 7 per cent QoQ) while it estimates Novelis’ Ebitda at $458 million (down 9.5 per cent YoY, 8.8 per cent QoQ. It sees Ebitda per tonne of S$490 for Hindalco (down 4.7 per cent YoY, 2.3 per cent QoQ.

For Vedanta, irt forecast an 8 per cent YoY drop (3 per QoQ) in Ebitda due to weaker commodity prices across segments, particularly in zinc and aluminium. For Nalco it suggested an Ebitda at Rs 650 crore (96 per cent YoY, 10 per cent QoQ, led by lower costs, partly offset by lower metal prices.

Hindustan Zinc, it said, may see Ebitda falling 32 per cent YoY (down 10 per cent QoQ), mainly led by lower zinc realisations and lower metal sales.

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