Metals & Mining

July 12, 2010

Ferrous Metal Update

Steel Prices Correct due to Excess Re-stocking and China Tightening
As stated in the past, re-stocking and de-stocking has an similar effect on steel prices as demand-supply
equation does. We highlighted in our previous report that there would be re-stocking cycle from the
beginning of Feb’10 due to expectation of higher steel prices on back of burgeoning raw material prices. This
was expected to keep the prices firm till May’10. However, re-stocking quantum proved to be higher than
demand, which coupled with China tightening and Eurozone crisis resulted in steady price decline from May
onwards.
Chinese Imports in India is Rising Steadily
Apart from declining global steel prices, steel companies are also reeling under pressure from Chinese
KSL - Sector Update

imports, which have made strong inroads in India in past couple of months. To put into perspective, Chinese
net exports to India stood at 5.6 lac tonne in the month of May’10 compared to 10.90 lac tonne for the entire
CY09. The current month import of steel stands at over 10% of total steel production in the month of May’10.
The case of putting anti-dumping duty on Chinese steel has been gaining momentum after looking at recent
import numbers.
Raw Material Prices Increased During the Quarter, Likely to Decline in Next Quarter
After moving to quarterly contracts, iron ore mining company (Vale) is moving to index based pricing, where
last quarter average would serve as a benchmark for next quarter pricing. This would result in higher prices
for iron ore during 2QFY11, however, prices are likely to drop for next quarter considering decline in last two
months. Coking coal companies have agreed for 12.5% hike for Jul-Sep quarter compared to last quarter,
however, coking coal prices are also likely to marginally drop in the next quarter. Apart from these two major
raw materials, zinc, aluminium, ferro alloy and scrap prices have also been on subdued trend for last two
months.
Outlook Seems Subdued for Current Quarter, Improvement from CY11 Likely
Steel prices are expected to remain subdued during current quarter on back of monsoon and subdued global
prices; however, prices would stabilize in the fourth quarter of CY10. We expect the fear of sovereign crisis to
fade in the next couple of months, while Chinese tightening is also expected to get moderate on back of
sluggish global economy and currency appreciation. These factors would enable steady rebound in steel
prices post CY10 in Indian market, while prices may remain stable in other developed countries.

Valuation Aggregates
P/E EV/EBITDA CMP Target (INR) % Gain Recom.
Companies FY10 FY11E FY12E FY10 FY11E FY12E (INR) Earlier Now (Loss)
JSW Steel 12.7 19.0 6.5 8.0 8.5 4.5 1,082 1,300 1,197 10.7 ADD
SAIL 11.9 13.9 10.6 7.4 8.6 6.9 194 274 236 21.6 BUY
Tata Steel -21.9 8.4 5.6 10.0 5.8 4.4 496 769 652 31.5 BUY

Analyst: Giriraj Daga

Email: giriraj@kslindia.com

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Khandwala Securities Limited

JSW Steel Limited

Ratings Steel Prices Revised Downward
LTP 1,096 Recommendation ADD
After recent correction in steel prices, we have revised our
Target 1,197 Risk HIGH
FY11 and FY12 steel price assumption downward by 4% and
Bloomberg Consensus 3% respectively.
(BUY/HOLD/SELL) 31 / 6 / 7 Volume Adjusted Marginally to Factor Current Trend
Our production and volume estimates has been marginally
Sensex Nifty BSE Metals
downgraded by 0.9% and 0.7% for FY11 considering current
17,834 5,352 14,838
Codes
quarter production.
BSE NSE Bloomberg Reuters Raw Material Prices Moved Marginally Downward
500228 JSWSTEEL JSTL IN JSTL.BO We have also revised raw material price assumption after
factoring latest coking coal price contract and recent
Sensex JSW Steel
movement in aluminium and zinc prices. These factors have
52 Wk: Hi/Lo 18,048/10,716 1,350/475
Life High 21,207-Jan 08 1,389-Dec 07
resulted in 0.4% and 2.9% decrease in blended cost per tonne
P/E 21.23 10.32 for FY11 and FY12 respectively.
P/BV 3.40 2.16 Change in Earning Estimates
Dividend Yield (%) 1.17 0.88 Modest decline in realization coupled with marginal drop in
Mkt Cap (INR Mn) 64,391,147 202,332
raw material cost has resulted in sizeable downward revision
Equity (INR Mn) - 1,871
* - TTM standalone basis Capitaline
in earning estimates.
Descriptions Earlier New %
Share Holding Pattern % Mar-10 Jun-10 Assumption Assumption Change
Foreign 37.93 34.84
FY11 FY12 FY11 FY12 FY11 FY12
Institutions 5.11 6.12
Government 0.66 0.66 Sales Volume (MT)
Corporate 3.39 5.12 Steel 6.71 7.92 6.67 7.92 -0.7 0.0
Promoters 45.00 44.99 Parameter (INR/Tonne)
Public & Others 7.91 8.27
Realization 38,289 39,508 36,754 38,311 -4.0 -3.0

Returns % Abs Relative to Cost 30,849 29,808 30,741 28,932 -0.4 -2.9
Perf Sensex BSE Metals EBITDA 7,440 9,700 6,013 9,379 -19.2 -3.3
1 Month 3.93 -1.45 0.90 Financials (INR Mn)
3 Months -11.27 -11.16 7.66
Net Sales 269,841 332,057 258,281 323,235 -4.3 -2.7
1 Year 111.40 79.34 64.75
EBITDA 50,723 78,975 40,877 76,498 -19.4 -3.1
PAT 17,084 34,538 10,635 32,854 -37.7 -4.9
Relative Price Performance
Valuation
280 JSW Steel Sensex
JSW is trading at a P/E multiple of 19.0x and 6.5x FY11 and
FY12 respectively, while EV/EBITDA multiple stood at 8.5x
220
and 4.5x for same period. Our target price has been revised
downward from Rs 1,300/share to Rs 1,197/share and as the
stock is offering 10% upside from CMP, we change our
160 recommendation from ‘BUY’ to ‘ADD’.
Financial Summary
(INR Mn) FY2008 FY2009 FY2010 FY2011E FY2012E
100
Net Sales 131,924 159,775 189,572 258,281 323,235
EBITDA 35,928 32,483 41,658 40,877 76,498
40 PAT 17,309 2,749 15,976 10,635 32,854
Jul-09 Jan-10 Jul-10 EPS (INR) 92.5 14.7 85.4 56.9 166.9

KSL – Metals & Mining Sector Update 2

July 12, 2010
Khandwala Securities Limited

Steel Authority of India Limited (SAIL)

Ratings Steel Prices Revised Downward
LTP 198 Recommendation BUY
Target 236 Risk HIGH
After recent correction in steel prices, we have revised our
FY11 and FY12 steel price assumption downward by 4% and
Bloomberg Consensus 3% respectively. Our expectation has built-in steady rebound
(BUY/HOLD/SELL) 26 / 10 / 5 in steel prices in the second half of FY11 and thereafter we
expect a modest rise of 4% during FY12.
Sensex Nifty BSE Metals
17,834 5,352 14,838
Raw Material Revised Marginally Upward
Codes We have also revised raw material prices marginally after
BSE NSE Bloomberg Reuters factoring in latest coking coal price contract. We have also
500113 SAIL SAIL IB SAIL.BO revised the other raw material prices like aluminium, ferro
alloy and coke. These factors have resulted in 1% increase in
Sensex SAIL
52 Wk: Hi/Lo 18,048/10,716 259/139
blended cost per tonne for FY11 and FY12 respectively.
Life High 21,207-Jan 08 293-Dec 07 Change in Earning Estimates
P/E 21.23 11.83
Modest decline in realization coupled with marginal drop in
P/BV 3.40 2.40
Dividend Yield (%) 1.17 1.34 raw material cost has resulted in sizeable downward revision
Mkt Cap (INR Mn) 64,391,147 801,711 in earning estimates.
Equity (INR Mn) - 41,304 Descriptions Earlier New %
* - TTM standalone basis Capitaline
Assumption Assumption Change
Share Holding Pattern % Dec-09 Mar-10 FY11 FY12 FY11 FY12 FY11 FY12
Foreign 4.47 4.54 Sales Volume (MT)
Institutions 7.58 7.47 Steel 12.51 13.63 12.51 13.63 0.0 0.0
Corporate 0.36 0.40
Parameter (INR/Tonne)
Promoters 85.82 85.82
Public & Others 1.77 1.77 Realization 38,745 39,718 37,075 38,457 -4.3 -3.2
Cost 29,469 29,142 29,834 29,387 1.2 0.8
Returns % Abs Relative to EBITDA 9,275 10,576 7,242 9,070 -21.9 -14.2
Perf Sensex BSE Metals
Financials (INR Mn)
1 Month -1.87 -7.26 -4.91
3 Months -17.74 -17.63 1.19 Net Sales 499,108 559,313 477,605 541,548 -4.3 -3.2
1 Year 28.42 -3.64 -18.23 EBITDA 119,482 148,937 93,289 127,720 -21.9 -14.2
PAT 76,455 92,159 57,757 75,949 -24.5 -17.6
Relative Price Performance Valuation
175 SAIL Sensex SAIL is trading at a P/E multiple of 13.9x and 10.6x FY11 and
FY12 respectively, while EV/EBITDA multiple stood at 6.9x
and 6.3x for same period. Our target price has been revised
150
downward from Rs 274/share to Rs 236/share, however, the
stock is still offering 22% upside from CMP and therefore, we
125
retain our ‘BUY’ recommendation.
Financial Summary
(INR Mn) FY2008 FY2009 FY2010 FY2011E FY2012E
100
Net Sales 402,159 442,084 418,897 477,605 541,548
EBITDA 113,390 90,235 99,394 93,289 127,720
75 PAT 75,369 61,748 67,500 57,757 75,949
Jul-09 Jan-10 Jul-10 EPS (INR) 18.2 14.9 16.3 14.0 18.4

KSL – Metals & Mining Sector Update 3

July 08, 2010
Khandwala Securities Limited

Tata Steel Limited

Ratings Steel Prices Revised Downward
LTP 503 Recommendation BUY
We have revised our FY11 and FY12 steel price assumption
Target 652 Risk HIGH
downward by 4% and 3% respectively. Bearing in mind the
Bloomberg Consensus price movement in European region, we have also revised our
(BUY/HOLD/SELL) 24 / 10 / 10 Tata Steel Europe expectation downward by 2% and 3% for
FY11 and FY12 respectively.
Sensex Nifty BSE Metals
Raw Material Revised Marginally Upward
17,834 5,352 14,838
Codes We have revised raw material prices marginally after
BSE NSE Bloomberg Reuters factoring in latest iron ore and coking coal price contracts and
500470 TATASTEEL TATA IN TISC.BO movement in ferro alloy, zinc and scrap prices. These factors
have resulted in 0.5% and 1.5% decrease in blended cost for
Sensex TATA STEEL domestic operation for FY11 and FY12 respectively, while
52 Wk: Hi/Lo 18,048/10,716 737/331
overseas subsidiaries has seen a rise of 1% and drop of 4% in
Life High 21,207-Jan 08 970-Oct 07
P/E 21.23 8.72
blended cost for the same period.
P/BV 3.40 1.93 Change in Earning Estimates
Dividend Yield (%) 1.17 2.65
Modest decline in realization coupled with marginal drop in
Mkt Cap (INR Mn) 64,391,147 439,967
raw material cost has resulted in sizeable downward revision
Equity (INR Mn) - 8,872
* - TTM standalone basis Capitaline
in earning estimates.
Descriptions Earlier New %
Share Holding Pattern % Dec-09 Mar-10 Assumption Assumption Change
Foreign 19.74 21.29
FY11 FY12 FY11 FY12 FY11 FY12
Institutions 24.80 23.91
Corporate 3.40 2.87 Domestic Volume (MT)
Promoters 31.25 31.32 Steel 6.60 6.80 6.60 6.80 0.0 0.0
Public & Others 20.81 20.60 Parameter (INR/Tonne)
Realization 46,263 47,273 44,615 46,023 -3.6 -2.6
Returns % Abs Relative to
Perf Sensex BSE Metals Cost 27,422 27,992 27,289 27,585 -0.5 -1.5
1 Month 5.20 -0.19 2.16 EBITDA 18,842 19,281 17,326 18,438 -8.0 -4.4
3 Months -27.52 -27.41 -8.59 Con Financials (INR Mn)
1 Year 40.53 8.48 -6.12
Net Sales 1,141,420 1,170,507 1,142,998 1,162,570 0.1 -0.7
EBITDA 173,396 194,369 146,599 179,943 -15.5 -7.4
Relative Price Performance PAT 72,515 89,484 52,197 78,496 -28.0 -12.3
200 Tata Steel Sensex
Valuation
Tata Steel is trading at a P/E multiple of 8.4x and 5.6x FY11
175
and FY12 respectively, while EV/EBITDA multiple stood at
5.8x and 4.4x for same period. Our target price has been
150 revised downward from Rs 769/share to Rs 652/share,
however, the stock is still offering 31% upside from CMP and
125 therefore, we retain our ‘BUY’ recommendation.
Financial Summary
100 (INR Mn) FY2008 FY2009 FY2010 FY2011E FY2012E
Net Sales 1,310,908 1,457,046 1,017,578 1,142,998 1,162,570
75 EBITDA 177,824 184,962 80,427 146,599 179,943
Jul-09 Jan-10 Jul-10
PAT 123,500 40,728 -20,092 52,197 78,496
EPS (INR) 169.0 55.7 -22.6 58.8 88.5

KSL – Metals & Mining Sector Update 4

July 12, 2010
Khandwala Securities Limited

Global HRC Prices Global Long Prices

After steady improvement from the beginning of FY10 Global long steel price decline has been heavier
onwards, global HRC price have shown marginal compared to HRC due to delay in construction and
decline on back of China tightening. infrastructure rebound across the globe.

1,200 (USD/Tonne) 1,150 (USD/Tonne)

950
900

700

650
450

200 400
Jan-08 Apr-09 Jul-10 Jan-08 Apr-09 Jul-10

Source: Khandwala Research, Bloomberg Source: Khandwala Research, Bloomberg

Iron Ore Prices Coking Coal Prices

Iron ore prices have seen very sharp volatility in last Coking coal prices has not declined, however, it has
couple of quarter with strong surge and correction in not risen much in the past and currently quoting near
the same magnitude. its long term average.

220(USD/Tonne) 240 (USD/Tonne)

175 218

130 195

85 173

40 150
Jan-08 Apr-09 Jul-10 Apr-09 Nov-09 Jul-10

Source: Khandwala Research, Bloomberg Source: Khandwala Research, Bloomberg

KSL – Metals & Mining Sector Update 5

July 12, 2010
Khandwala Securities Limited

Indian Flat Steel Prices Indian Long Steel Prices

After improving over 20% from Mar’10 level, steel Long steel prices have also seen a moderate
prices have witnessed moderate correction due to correction as restocking exercise is over and industry
global downward pressure. is approaching monsoon season.

48,000 (INR/Tonne) 44,000 (INR/Tonne)

42,000 37,000

36,000 30,000

30,000 23,000

24,000 16,000
Jan-08 Apr-09 Jul-10 Jan-08 Apr-09 Jul-10

Source: Khandwala Research, Company Source: Khandwala Research, Company

India Steel Production India Net Exports/(Imports) of Iron & Steel to

China

India steel production has witnessed strong rise in Imports from China have reached its highest level,
past quarter after remaining steady from the last 30 which is creating significant pressure in the domestic
months. market.

6 (MT) 2 (Lac Tonne)

5 0

4 -2

3 -4

2 -6
Jan-04 Mar-07 May-10 Jan-04 Mar-07 May-10

Source: Khandwala Research, Company Source: Khandwala Research, Company

KSL – Metals & Mining Sector Update 6

July 12, 2010
Khandwala Securities Limited

Analyst Certification
Each of the analyst(s) named certify, with respect to the companies or securities they analyse that:
(1) all the views expressed in this report accurately reflect his/her/their personal views about any
and all of the subject companies and securities; and (2) no part of his/her/their compensation was,
is, or will be, directly or indirectly, related to the specific recommendations or views expressed in
this report.

KSL Ratings
Target Price refers to one year unless specified; LTP: Last Trading Price
BUY: Expected return >15%
ADD: Expected return 0-15%
REDUCE: Expected decline 0-15%
SELL: Expected decline >15%

Company Risk is based on the systematic risk of the stock. (1-year Beta)
HIGH: >1.2
MEDIUM: 0.8-1.2
LOW: < 0.8

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KSL – Metals & Mining Sector Update 7

July 12, 2010
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KSL – Metals & Mining Sector Update 8
July 12, 2010