Commodity rally to create new winners and losers in coming quarters

Metal & mining firms to gain; others may see margins contract

The recent surge in metals and energy prices is expected to lead to record profits for metal, mining, and oil & gas companies in the coming quarters but could hurt the margins and profitability of the rest of India Inc. The biggest hit will be felt by companies in sectors such as automobile, auto ancillary, consumer durables and non-durables, capital goods, and engineering. 

The net impact on India Inc’s profits would depend on the interplay between the gains of producer industries and user industries. In the second quarter, metal and mining companies such as Tata Steel, JSW Steel, Hindalco, Hindustan Zinc, and NMDC reported the combined revenues of Rs 1.7 trillion, as against around Rs 3 trillion of user industries.

In the last two quarters, India Inc gained from a sharp decline in metals and crude oil prices. The resulting decline in raw material and energy costs more than cushioned the blow from the contraction in revenues, and listed companies reported a sharp turnaround in net profit in the September 2020 quarter (Q2FY21). 

The earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins were up 620 basis points on a year-on-year (YoY) basis to a record high of 28.1 per cent in Q2FY21. The combined net sales were down 5.2 per cent YoY during the quarter.

Banks, on the other hand, gained from an equally sharp decline in interest rates and moratorium on bad loans due to a Supreme Court decision. The combined net profit of around 2,700 listed companies across sectors was up 40 per cent YoY during the second quarter.

These tailwinds are now dissipating. Steel prices are up nearly 40 per cent in China, the world's top consumer, from their 52-week low in April this year, while it’s up 35 per cent in India. The London Metal Exchange (LME) is up nearly 50 per cent from its 52-week lows earlier this year. The LME tracks the prices of non-ferrous industrial metals such as aluminium, copper, lead, nickel and tin. 

Copper prices on the LME have not only gained more than 18 per cent from early-October lows, but are up almost 65 per cent from the troughs in March. Similarly, crude oil prices have doubled since July. All this will translate into higher manufacturing cost for India Inc in the third and fourth quarter, making it tough for companies to report higher margins and profitability