The Indian markets are expected to open flat to positive mirroring the SGX Nifty and Asian stocks which are trading higher in the opening trade. Asian stocks rose, with the benchmark regional index heading for its first advance in four days, as mining companies gained after metal prices increased and industry bellwether Alcoa Inc. reported better-than-expected profit.
The release of results from Alcoa is seen as the unofficial start of the earnings season, as the company is typically the first Dow component to release its results. Stocks in US saw moderate weakness during trading on Monday but ended the session well off their worst levels of the day as lingering economic concerns weighed on the markets. Uncertainty about the situation in Europe also generated some selling pressure, as euro zone finance ministers hold another meeting in Brussels.
China’s imports rose less than anticipated in June while export growth slowed, adding pressure on the government to support expansion after inflation data yesterday showed demand softening. Indian shares fell notably on Monday, mirroring a weak trend across Asia and Europe as dismal economic data from the U.S. and Japan coupled with worries about a slowing Chinese economy kept investors on edge.
The trend deciding level for the day is 17,407 / 5,278 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,471 – 17,549 / 5,298 – 5,321 levels. However, if NIFTY trades below 17,407 / 5,278 levels for the first half-an-hour of trade then it may correct up to 17,328 – 17,265 / 5,255 – 5,235 levels.
HZL – A better bet in the non-ferrous space over Hindalco
Prices of non-ferrous metals (alongside non-ferrous stocks) have declined steeply over the past one year on the back of escalating sovereign credit crisis in Europe. Prices of aluminium and zinc are below the cost of production for several smelters around the world. Several big players such as Rio Tinto and Alcoa have already announced production cuts over the past six months. Hence, we do not expect current levels of base metal prices to sustain over the medium term. In light of the anticipated increase in the prices of base metals, we analyzed the likely impact on the stock price performances of Hindalco and Hindustan Zinc (HZL).
Hindalco’s stock performance is likely to be determined by the timely commencement of its upcoming projects, timely development of captive assets and the movement in aluminium prices in our view. We believe Hindalco stock’s correlation with LME aluminium prices (in INR terms) will remain lower than historical levels. On the other hand, with a strong balance sheet, lower capex requirements, 12% growth in EPS over FY2012-14 and compelling valuations, we believe HZL is an attractive bet at current price levels. Moreover, with a strong correlation (83%) between aluminium and zinc prices, we believe HZL is a better way to play upside in base metal prices.
Hindalco’s upcoming projects continue to face delays: As highlighted in our report on Hindalco dated June 13, 2012, we anticipate project delays alongside lower profitability from its aluminium business during FY2013-14. On June 26, 2012, Hindalco announced that it had delayed the commissioning of its Mahan smelter (earlier scheduled to commission during 1QFY2013), in-line with our expectations.
Hindalco – No longer a 100% proxy for aluminium prices: Hindalco’s stock had a strong correlation with INR-denominated LME aluminium prices since the past 22 years. However, over the past one year, this correlation has dropped significantly mainly on account of project delays. Further, with massive aluminium capacity expansion ahead, we believe stock performance will be determined by the timely commencement of these projects, timely development of captive assets and the movement in spot aluminium prices. Hence, Hindalco will no longer be a 100% proxy on aluminium prices over the coming 2-3 years in our view.
Zinc and aluminium metals have high correlation: Although zinc and aluminium metals have different cost structures, there is high correlation between the prices of these metals. The correlation between zinc and aluminium prices since the past 20 years has been 83%. Even over the past one year, zinc and aluminium prices have witnessed declines of similar quantum – zinc and aluminium prices declined by 23% and 25%, respectively. Hence, we believe any rise in aluminium prices hereon should also be accompanied by an increase in zinc prices and vice versa. With a cash-rich balance sheet and rising production of zinc, lead and silver over FY2012-14, HZL remains our top pick in the non-ferrous space. Valuing the stock at 4.0x FY2014 EV/EBITDA, we recommend Buy on HZL with a target price of Rs.141. We maintain our Neutral rating on Hindalco.
TVS Motor is looking for a technological tie-up with BMW
TVS Motor (TVSL) is in talks with BMW’s motorcycle division, BMW Motorrad, for a technological tie-up for high-end bikes. As per media reports, the partnership will likely involve a technology-sharing pact and may also extend to joint marketing. While management has refrained from divulging any further details regarding the partnership, it has stated that the sale of equity stake is not being considered. We believe the technological-sharing pact with BMW will help TVSL acquire technological know-how to develop more powerful motorcycles and extend its premium bike range, where it currently has Apache (160cc and 180cc). While the development is certainly positive for the company in the long run, it is unlikely to have any significant impact on the positioning of TVSL in the domestic motorcycle industry in the near term as BMW currently offers products in the >600cc category, which has a very limited domestic market. At Rs.40, the stock is trading at 7.5x FY2014E earnings. Post the recent run-up in the stock price (~20% over the past one month), we recommend an Accumulate rating on the stock with a target price of Rs.42.
Economic and Political News
- GAAR panel for modification of norms, reduction of examples
- RBI concerned over slow deposit growth: IBA
- Congress keen on Hamid Ansari as Vice President
- OMO will depend on liquidity situation: RBI
- Infosys likely to pare FY2013 revenue growth forecast
- ONGC starts release of gas for Palatana power project
- RCom sets price range of US$1.09-1.32 for Singapore IPO
- Big brands to remain primary growth drivers: Godrej