Better margins for metal firms likely in Q2

For base metal producers, rising rupee set to partly offset profitability

The profitability of Indian base metal manufacturers is likely to witness a substantial improvement in the July-September quarter due to a sharp increase in the prices of underlying metals in global markets.

While the benchmark spot London Metal Exchange (LME) lead and zinc prices jumped by 11 per cent and 17 per cent, respectively, during the September quarter, copper and aluminium reported increases of 10 per cent and 11 per cent, respectively. 

Indian manufacturers link their product prices with those on LME while factoring in the rupee-dollar movement. Non-ferrous metal players have been reporting a strong margin expansion in the last one year on the back of rising commodity prices, robust volume growth and benign input costs. However, in the April-June quarter of the current financial year, margins were under pressure sequentially due to rupee appreciation, correction in prices of metals and higher input costs. 

Thus, the turnaround in their financial numbers would come as a major relief for metal producers. For base metal producers, the appreciating rupee is set to partly offset the increase in margins through metal price increases.

“Nifty metal companies are likely to see earnings increasing by a substantial 143 per cent, year on year. We expect metal stocks to report solid earnings growth supported by relatively firm global commodity prices,” said Abhay Laijawala, research analyst, Deutsche Bank, in a recent report.

Reflecting the trend, Hindustan Zinc posted 34 per cent growth in its net profit for the September quarter at Rs 2,545 crore on both higher prices and volumes. 

Revenue jumped by 37 per cent year-on-year to Rs 5,232 crore. Agnivesh Agarwal, chairman, Hindustan Zinc, attributed the growth in financial performance to accelerating LME prices and record silver volumes.

Meanwhile, higher aluminium prices are set to drive the financial performance of aluminium producers, including Hindalco and Nalco. Kunal Motishaw, an analyst with Reliance Securities, forecasts Hindalco’s standalone operating profit to rise by 12 per cent year-on-year on the back of higher prices, but this will be limited by the alumina transfer price from Utkal. 

He says LME prices are likely to remain benign going forward on the back of plant closures in China, thereby increasing the global aluminium deficit.  Average LME aluminium prices increased by 5.2 per cent over the previous quarter and 24 per cent year-on-year to average at $2,009 a tonne for the September quarter. Interestingly, aluminium prices have gone up further to trade currently at $2,140 a tonne. “Consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) of Vedanta for the September quarter is likely to improve by 17 per cent on higher profitability in its zinc, copper and power businesses. 

However, its aluminium business is likely to be hit on higher power and alumina costs. Hindalco’s overall standalone Ebitda  would improve by 16 per cent, driven by higher volume and prices as well as higher treatment and refining charges margin at its copper business,” Ravi Sodah, analyst, Elara Securities, said. 

Echoing a similar response, Tarang Bhanushali, analyst, IIFL, believes that improvement in commodity prices would bring further margin expansion in Q3 as the rupee has appreciated further while input costs have not risen as much.