Higher realisations to lend support to steel firms in December quarter

Operational performance of metal companies seen muted in January-March

In an echo of the trend in stocks in the last few months, the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of domestic steel companies is seen up year-on-year in October-December, mainly on higher realisations, brokerages said.

“Ferrous companies are likely to report a 56 per cent year-on-year and seven per cent quarter-on-quarter Ebitda margin jump because of strong realisations and lower costs, particularly of coking coal,” Nirmal Bang Institutional Equities said in a note.

The steel sector is price-driven. Multiple price rises in three months will lead to better margins, said an analyst at a local brokerage. “Volumes haven't picked up mainly because of weak demand.”

Volume pick-up remained lacklustre also due to an extended monsoon and logistical challenges, brokerages said.

Quarter-on-quarter, too, most producers are expected to report flat volumes while margins are expected be higher, said Motilal Oswal in its report.

“Prices showed an improvement in North America and Europe in October-December, increasing three per cent and two per cent quarter-on-quarter, respectively, on demand expectations.”

Prices of ore and coking coal were mostly unchanged. Quarter-on-quarter, ore price increased a per cent to $136 a tonne, while coking coal’s declined one per cent to $141 a tonne.

In India, steel prices increased due to rises taken to cover higher costs, said brokerages.

Depreciation of rupee against the dollar made NMDC raise ore prices for fines and lumps twice during October-December. Fine  prices in Odisha moved from a low of Rs 1,500 a tonne in the September quarter to Rs 2,200 a tonne in the December one.

Due to this, long and flat steel product prices were raised two per cent quarter on quarter.

Tata Steel’s consolidated net profit is seen at Rs 800 crore from a loss of Rs 743 crore a year ago, said Motilal Oswal. "We expect Tata Steel Europe and other subsidiaries to report an Ebitda/tonne of $34 due to slightly higher prices," said the brokerage. SAIL revenues are seen up five per cent year-on-year, with profit rising 30 percent, it said. JSW Steel’s consolidated net profit is expected to be Rs 650 crore, said Motilal. Foreign-exchange losses will be absent from the December quarter due to the hedging of outstanding payable, said Centrum brokerage.

Non-ferrous segment
In the non-ferrous segment, realisations will be better quarter-on-quarter for zinc and lead businesses but flat for aluminum, said analysts. Overall, the net profit of these companies is also expected to remain flat quarter-on-quarter, they said.

“We cannot see any major change in Hindalco or Sesa Sterlite earnings,” said an analyst at a domestic brokerage. “Hindustan Zinc will continue to do well mainly on lower cost of production.”

Hindustan Zinc’s net profit is seen up 19 per cent year-on-year, led by higher operating profits. Revenue is seen 15 per cent year-on-year on an increase in volumes, said Centrum brokerage.

Earnings of Sesa Sterlite will largely take support from Hindustan Zinc and Cairn India, and are seen almost flat compared with the September quarter, said brokerages.

In the case of Hindalco Industries, revenue is seen up on higher aluminium volumes. Realisations, however are seen subdued due to lower London Metal Exchange prices, to be partially mitigated by a weak rupee.

“We continue to prefer Hindustan Zinc over Sesa Sterlite and Hindalco Industries in the non-ferrous space,” said Centrum.

The recent run-up in metal stocks is not seen as continuing, as most brokerages expect a muted operational performance in the final quarter on lower-than-expected realisations despite price rises.

The January-March quarter is supposed to be the peak demand season for metal companies as construction activity is in full-swing during this period.