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Gauging Covid-19 impact…
The Coronavirus outbreak has led to lockdowns in many countries globally. It is likely to have an adverse impact on global growth rates. The Coronavirus pandemic, which had initially surfaced in Wuhan, China around three months ago, has rapidly spread across European countries (especially Italy, Spain and Germany) along with the US. As commodities are closely linked to the global growth outlook, the lockdowns of countries and economic activity coming to a standstill have had an adverse impact on metal demand and prices. Initially, during the start of CY20, the epicentre outbreak of Coronavirus pandemic was China, which is also world’s largest consumer of metals. Hence, metal prices witnessed a downward slide since the start of CY20.
Now, the epicentre of the virus has shifted to Europe and the US from China. As China limps back to normalcy, renewed fears of dumping from China have emerged. This is likely to keep metal prices, in general, under check. In this scenario of waning demand, prices of key inputs are also likely to remain subdued. However, the weakness in prices of finished products is likely to be more than the weakness witnessed in input prices, which is likely to put pressure on operating margins in FY21E.
The prices of copper, zinc, lead and aluminium are steeply lower both on a QoQ as well as YoY basis. The downward slide in zinc and lead prices is likely to adversely impact the earnings of Hindustan Zinc. Also, the muted demand from key user industry along with the fall in aluminium prices is likely to have an adverse impact on Hindalco’s earnings.
Valuation & Outlook
Currently, Europe and the US are the epicentre of the Coronavirus break and economic activity in this regions has significantly been impacted. Hence, domestic companies with exposure to these geographies are likely witness steep earnings cut. Among our coverage universe, in addition to domestic operations, Tata Steel and JSW Steel also have overseas manufacturing operations both in Europe as well in the US (Tata Steel has manufacturing operations in Europe while JSW Steel has manufacturing operations in Italy and the US). On account of the spread of Coronavirus pandemic and subsequently the lockdown situation in various countries, we downward revise our estimates. We believe the demand pick-up for the steel sector would be more gradual in nature and is thereby likely to weigh on final product prices. Hence, we expect operating margins of steel companies to be under pressure (especially during H1FY21E). Operating performance of nonferrous companies is also likely to be adversely impacted due to weakness in base metal prices on the LME. We downward revise earnings for Tata Steel, JSW Steel, Hindalco and Hindustan zinc. We maintain our HOLD recommendation on Tata Steel, JSW Steel and Hindalco with a revised target price of | 275, | 150 and | 100, respectively. We also maintain BUY recommendation on Hindustan Zinc with a revised target price of | 180.
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