Q2FY13 saw Chinese steel prices and LME aluminium/zinc prices at 3 year lows and bounce up from there. Global average aluminium margins are at 25 year lows.

''We believe we have seen the worst and prices/margins should improve from these levels into FY14. In steel, we largely maintain our FY14 Indian steel price assumption but cut in hard coking coal prices by approx. 12% boosts EBITDA/t in FY14 over current levels. Our estimates incorporate this improvement and we revise upwards wherever applicable,'' said Edelweiss Research.

It believes the market is assigning 50% to 100% discount to CWIP considering sector slowdown and project issues. While project issues may continue, sector tailwinds will still improve IRRs and reduce the discount. It notes that SAIL, Sterlite and Hindalco have the highest CWIP to EV ratio at 54%, 38% and 49% respectively and will benefit the most from this.  

''We continue to expect a weak developed world but with its share of metals demand down to around 30% and declining further we see negative  impact mitigated. Regulatory action in mining is the other risk," it said.

Edelweiss's top picks are Tata Steel, Hindalco and Sterlite - all of whom will see increase in volumes and margins in FY14. While its TP for Tata Steel is unchanged at Rs 516, TP for Hindalco and Sterlite are revised upwards to Rs 171 and Rs 139  respectively, it said.

''We upgrade both SAIL and Sesa to BUY from HOLD with TP of Rs107 and Rs 231 respectively. We retain BUY on JSW Steel (TP of INR976, up from INR868), JSPL (TP: INR508), HZL (TP: INR155) and Coal India (TP: INR410); retain HOLD on Usha Martin (TP: INR35). Retain REDUCE on Bhushan Steel with TP of INR417 and NALCO with TP of INR44,'' it added.

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