Executive Summary
􀂄 Rising lead indicators imply real demand recovery in future
Lead indicators across the board viz. PMIs, new orders indices, IFO’s indices and
Conference Board LEI are showing sustained improvement. PMI curves seem to suggest
a V-shaped recovery. While China and India are already in a strong expansion mode, we
expect recovery in the developed world to commence from Q4FY09.
􀂄 Metal prices expected to rise greater than input prices
With severe demand collapse recently, certain metal prices have fallen far more than
input prices. Cost of making aluminium is currently ~5.5% above CY04 levels, but its
YTD CY09 price is 15.5% below average CY04 levels. Also, coking coal and iron ore
prices are above CY07 levels, while global steel prices are around CY05 levels. As
demand improves, we expect the reverse dynamic to play out, i.e., metal prices to rise
more than input prices. Steel prices, which bottomed at USD 191/tonne in CY01, shot up
38% in CY02, while iron ore prices declined 2% and coking coal prices increased only
12%. We expect European steel prices to rise 17% in FY11E with operating costs
increasing 6%, Y-o-Y.
􀂄 Steel and aluminium prices to find support in marginal cost
Steel and aluminium prices are still below/near marginal cost, while zinc and copper
prices are well above the same. We expect steel and aluminium prices to rise above their
respective marginal costs, with a better spread for steel w.r.t. that of aluminium.
􀂄 Metal inventories, inventory-to-shipment ratios reducing/stabilising
Metal inventories and inventory-to-shipment ratios have started reducing/stabilising,
except for aluminium. Steel inventories in the US are at all-time lows since 1997.
􀂄 Supply discipline better than expected
Supply discipline has been better than anticipated, with production cuts exceeding
demand decline across metals. We believe significant capacities are either mothballed or
housed in financially weakened companies, making restarts difficult.
􀂄 Outlook: Ride the recovery, but remain selective
We are revising our FY11 metal price estimates upwards between 5% (steel) and 44%
(copper). Even as the global recovery plays out, we would advise investors to be
selective in their commodity plays (considering respective inventory positions and
capacity surpluses) and stock selection. Balance sheet and operating cost considerations
should drive stock selection. We continue to be positive on zinc and iron ore and
negative on aluminium. We turn positive on global steel, considering reduced inventories
and strong supply side discipline. Key surprise has been stable Indian steel prices since
January 2009 in the face of global pricing declines.
We upgrade Tata Steel from HOLD/SO to BUY/SO and Steel Authority of India (SAIL)
from REDUCE/SU to HOLD/SP. We retain our recommendations for rest of the coverage
stocks, viz., Sterlite Industries (BUY/SO), Usha Martin (BUY/SO), Hindustan Zinc
(BUY/SO), Sesa Goa (HOLD/SO), Hindalco (REDUCE/SU), JSW Steel (REDUCE/SU),
JSPL (Reduce/SU) and NALCO (REDUCE/SU). Our top picks are: Sterlite, Tata Steel,
HZL, Sesa Goa and Usha Martin.

Contents
At a glance ................................................................................................................. 3
Investment Rationale ................................................................................................... 3
Revision in Metal Price Forecasts ................................................................................. 13
Revision in Recommendations ..................................................................................... 15
Companies
Hindalco Industries .................................................................................................... 16
Hindustan Zinc .......................................................................................................... 21
Jindal Steel and Power ............................................................................................... 27
JSW Steel ................................................................................................................. 35
National Aluminium ................................................................................................... 41
Sesa Goa ................................................................................................................. 47
Steel Authority of India .............................................................................................. 53
Sterlite Industries ..................................................................................................... 60
Tata Steel ................................................................................................................ 67
Usha Martin .............................................................................................................. 74