Rupee to play crucial role in Jul-Sep earnings of metal firms

The rupee is expected to play a crucial role in the July-September earnings of metal companies, which include ferrous and non-ferrous firms.

The currency's depreciating trend, however, is seen having a different impact on companies' net profit and earnings before interest, taxes, depreciation and amortisation (Ebitda) level.

In the quarter ended September, the currency depreciated 5.4 per cent against the dollar. Because of this, companies in the ferrous segment might face high cost of production amid dull demand in the domestic market.

However, the weak rupee impact is expected to be offset partially by lower international coking coal prices and increased exports by steel producers, brokerages said.

LOSING SHEEN

• Base metal prices remained subdued on fear of the US Federal Reserve tapering its quantitative easing measures
• High interest, depreciating costs and foreign exchange losses are expected to result in depressed net profits
• Companies in the ferrous segment might face high cost of production amid dull demand in the domestic market
• Non-ferrous players however, benefitted from a weak rupee mitigating the lower London Metal Exchange realisation

Coking coal and iron ore are the key raw materials used in the making of steel. Coking coal is largely imported by domestic steel producers and a weak rupee pushes up the cost of production of the alloy.

"Volume pick-up remained smart in metals space aided by exports, attractive due to a weak rupee," said Centrum Equity Research in its report. While ferrous producers could push higher volumes in domestic and export markets despite weak demand, non-ferrous players benefited from a weak rupee mitigating the lower London Metal Exchange realisation and delivered higher production, the report noted.

During the quarter, base metal prices remained subdued on the back of fears of the US government tapering its quantitative easing measures. On a year-on-year basis, average copper, aluminium, and zinc prices declined by 7.9 per cent, 4.8 per cent and 1.3 per cent, respectively, said Angel Broking in its report. At the net profit level, high interest, depreciating costs and foreign exchange losses are expected to result in depressed net profits for companies, brokerages said.

"We expect adjusted PAT (profit after tax) to remain largely subdued on year-on-year basis as we see higher interest and depreciation costs impacting net profits of metal companies negatively," said Centrum Equity Research. "Sharp fall in the rupee is expected to result in large forex MTM (mark-to-market) losses ,which would keep reported PAT even lower," the report said.

Among ferrous companies, both JSW Steel Ltd and Steel Authority of India Ltd are expected to book forex mark-to-market loss due to rupee depreciation, said brokerages.

SAIL is expected to book forex MTM loss of Rs 58 crore, while JSW Steel might book forex MTM loss at Rs 569 crore in the period under review, said ICICI Securities.

Steel Authority of India's net profit is expected to decline 15 per cent year-on-year on account of lower overall profitability, higher interest and depreciation costs and lower other income, said Centrum Equity Research Ltd.

Tata Steel's revenue is seen flat on year on consolidated basis on account of low demand in Europe as well as India, said brokerages.

"On a consolidated basis, we expect (Tata Steel) Ebitda margins to decline 260 basis points to 8.7% on the back of neutralisation of Ebitda at the company's European operations," said ICICI Securities Ltd in its report.

Among non-ferrous companies, Hindustan Zinc Ltd is expected to record higher realisations on the back of weak rupee and higher volumes.

"We expect revenue to go up by 24 per cent y-o-y (year-on-year) on the back of increase in zinc and lead volumes," said Centrum Equity Research.

Higher aluminium realisation is expected to push up Hindalco Industries'revenue by 12 per cent, said the report. Net profit of the company, however, may be suppressed by higher depreciation and interest costs due to capitalisation of expansion projects.

In case of Sesa Sterlite Ltd, the company's adjusted net profit is seen at Rs 1,470 crore, according to Centrum. "We keep the stock under review and will issue a fresh call on the group post quarterly numbers," said the brokerage.