Macquarie - SAIL, Hindustan Zinc,JSW Steel, Tata Steel, Sterlite Industries

Macquarie on SAIL

Price catalyst
12-month price target: Rs146.00 based on a PER methodology.
Catalyst: Stable steel pricing environment.

Downgrade to Neutral: We value SAIL at a target PER of 8x on FY3/08E, which is in line with peers. Although the business outlook remains positive, SAIL’s stock price is already factoring in the best-case scenario. The stock has seen a PER re-rating in line with the steel sector as a whole. With very low possibility of the company being acquired, we do not believe that any further re-rating is on the cards.

Switch to Tata Steel: With the re-rating over, SAIL becomes a play on steel prices only. We believe that Tata Steel (TATA IN, Rs629, Outperform, TP: Rs800) provides a much better leverage to play the steel cycle; it is trading at 20% discount to SAIL on both PER and EV/EBITDA multiples.

Macquarie on Hindustan Zinc

Price catalyst

12-month price target: Rs1,035.00 based on a PER methodology.
Catalyst: Expansion of capacity by 50% and generation of huge cashflows should lead to a re-rating of the stock.

Action and recommendation

Attractive valuations: The stock is trading at a PER of just 5.7x on FY3/08 estimates. It is one of the cheapest zinc stocks globally and is trading at a 17% discount to its NPV valuation. Its peers Zinifex and Kagara Zinc are trading at respective premiums of 114% and 73% to their NPV valuations.

Maintain target PER multiple: We maintain our target PER multiple at 9x, in line with our multiple for other metal stocks.

Macquarie on JSW Steel

Price catalyst
12-month price target: Rs772.00 based on a PER methodology.
Catalyst: Strong earnings growth driven by volume growth and strong steel prices.

Action and recommendation
Maintain Outperform: JSW has a robust earnings outlook driven by strong volume growth, stable steel prices and the company’s move up the value chain. We retain our Outperform rating and target PER multiple of 8x, in line with the other Indian steel companies.

Macquarie on Tata Steel

Price catalyst
12-month price target: Rs800.00 based on a PER methodology.
Catalyst: Sustained high steel prices and benefits from the Corus acquisition.

Action and recommendation
Maintain Outperform: We value Tata Steel at 8x FY3/08E PER, in line with our target multiple for other Indian steel stocks, in spite of its better growth profile. Tata Steel is one of the cheapest steel stocks globally and is also trading well within its historical range.

Increasing target price: We have raised our target price for Tata Steel to Rs800 (from Rs556 previously), suggesting upside of 28%.

Risk factors: The main risk factor other than steel prices is the pension liability of Corus. Any change in the discount rate can appreciably affect the valuation of the company.

Macqaurie on Sterlite Industries

Price catalyst
12-month price target: Rs829.00 based on a Sum of Parts methodology.
Catalyst: Acquisition of 26% government stake in Hindustan Zinc and the
ramp-up of expanded capacity in aluminium and copper by FY3/08.

Action and recommendation

Attractive valuations: Sterlite is trading at a PER of 7.1x and an EV/EBITDA of 3.4x on our base-case scenario of 31% dilution and acquisition of additional 26% stake in HZ. In the most pessimistic case of 31%equity dilution and no stake increase in HZ, our sum-of-the-parts valuation is Rs642, an 18% upside.

Maintain Outperform: Sterlite is one of the fastest-growing diversified base metal companies with the lowest cost of production across metals. We retain our Outperform recommendation.