Profitability of steel and base metal companies is expected to improve during the March quarter, compared to the previous quarter, on the back of decreasing prices of key inputs and stable domestic prices. Operating margin may go up by 50 basis points (bps) for base metal and 350 bps for steel companies.
Steel demand improved sequentially, with companies raising prices by Rs 1,000-2,000 a tonne. Globally, steel prices rose during the three months to March, including increases in the Commonwealth of Independent States (10 per cent) and China (four per cent), according to analysts. Base metal prices rose modestly due to a status quo in the euro zone.
However, analysts at Motilal Oswal Securities believe the recovery in steel prices was a result of restocking and production cuts, rather than an improvement in the underlying demand scene. Prices have already started correcting in North America, as restocking demand seems to be over. Similarly, steel demand in China was also a function of restocking, rather than actual consumption.
On a year-on-year basis, base metal companies are expected to report a decline in net profit and flat to single-digit growth in sales for the second consecutive quarter. Sales growth of steel companies is expected to slip to single digit, while net profit may decline by over 25 per cent.
Among base metal companies, Hindalco may see a marginal improvement in domestic sales, while its consolidated sales may decline by over three per cent. Net profit may fall by 30 per cent on a stand-alone basis and by 20 per cent on a consolidated basis.
For the first time in 2011-12, Tata Steel is expected to report a fall in consolidated net sales. But it may post a net profit of Rs 886 crore, against a net loss of Rs 602 crore in the third quarter. State-run Steel Authority of India is likely to post single-digit growth in sales, but its net profit may decline.
For steel companies, the January-March period would be strong on a quarter-on-quarter (q-o-q) basis, as coking coal of lower cost will come on stream for most companies. Tata Steel’s European operations are expected to improve due to inventory write-down during the third quarter. JSW Steel will also benefit from lower coking coal cost and improved utilisation levels.
Analysts at Kotak Securities say steel companies’ earnings would see a relief rebound in the fourth quarter, primarily helped by strong seasonality. Steel prices rose by six-eight per cent q-o-q, while iron ore prices remained flat and coking coal spot prices further corrected. They believe due to a decline in domestic steel demand growth, there would be pressure on steel prices in the coming months.
However, depreciation of the rupee by four per cent in the fourth quarter is expected to affect price realisation of base metal companies. So, the positive q-o-q gain would be minimal for zinc and aluminium companies. Also, aluminium and zinc prices corrected by 10 per cent over last month or so, as reflected by the piling up of London Metal Exchange inventory date and that does not auger well for next quarter results.