Steelmakers to post weak earnings

Pressure from imports and subdued domestic demand to hurt performance

Primary steel producers are expected to report weak earnings in the July-September quarter. Top lines are seen taking a hit from dull demand and pressure from imports. Both volumes and prices are under pressure for most companies. Though import duties and the 20 per cent safeguard duty levied during the quarter may provide some cushion, falling steel prices, slowing growth in China and a disappointing pace of local economic recovery are seen having a deeper impact on realisations.

"We estimate realisations have fallen by an average Rs 8,000 per tonne, or 18 per cent year on year, due to weak global prices and a supply glut in global markets," said analysts at Prabhudas Lilladher in a report.

“Relentless import pressure from China and a sharp fall in global steel prices are expected to keep volumes and realisations muted, but the impact on operational profits will be mitigated by falling raw material costs and protection from increased duties," said Centrum Brokerage.

Apart from the duty protection, the District Mineral Foundation set the total royalty at 30 per cent against earlier expectations of 50-100 per cent. This could limit the damage for steel companies that have captive ore like Tata Steel and Steel Authority of India.

Centrum estimates earnings before interest, taxes, depreciation and amortisation (Ebitda) for JSW Steel and Tata Steel will fall by 41 per cent and 23 per cent, respectively, year on year. Steel Authority of India is estimated to post a loss at the Ebitda level.

Volumes at Tata Steel's European operations are expected to grow 4.2 per cent to 3.5 million tonnes year on year, but it is not likely to help the consolidated Ebitda, which is seen declining 16-28 per cent based on different estimates. Profit after tax, however, is seen rising 120-390 per cent led by exceptional gains.

Sequentially, with volumes expected to grow 1.7 per cent, it should lend some support to Tata Steel's consolidated Ebitda margin, which could rise to 10 per cent from 9.2 per cent in the year-ago period, said Prabhudas Lilladher.

Most large steel companies are expected to post a good increase in Ebitda and net profit on a sequential basis, led by lower costs as their top lines are likely to remain flat.

Among non-ferrous companies, the 11-15 per cent sequential fall in global base metal prices is expected to hurt the profitability of Hindalco and Vedanta.

Earnings at Hindalco would be subdued sequentially due to the sharp fall in Ebitda per tonne of its aluminium operations, while Vedanta would face the adverse impact of lower profitability in aluminium and oil and gas, said Centrum.

Vedanta's profitability from Cairn India is pegged lower year on year on the sharp fall in crude oil prices as well as the pressure on the aluminium business. Its copper operations, on the other hand, are expected to deliver steady earnings.

Higher volume growth in the refined zinc business, lower imported coal costs, and economies of scale would shore up Hindustan Zinc’s Ebitda by 11 per cent sequentially, said Religare Institutional Research.

This Vedanta cash cow is expected to report a drop in net sales from the corresponding period last year. Consequently, its Ebitda per tonne is expected to be lower, leading to a 3 per cent drop at the net level.

Most brokerages prefer JSW Steel over Tata Steel or SAIL in the ferrous space and Hindustan Zinc in the non-ferrous segment. “JSW Steel will benefit as it has no captive source of ore and so its usually high input cost drops,” said Giriraj Daga, senior analyst with SKS Capital & Research. “Also, JSW Steel's fixed costs are the lowest among the top steel producers. This makes the company our first pick,” he added.

"We maintain our negative outlook on the steel sector. However, we like JSW Steel on the back of lower domestic iron ore prices, highly efficient operations and attractive valuations," said Prabhudas Lilladher.